Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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................................. 30 Figure 10: CPI Index Comparison ........Selected Centres ..8¢ Pump Price) .. 57 Figure 31: Winnipeg ........................Price History ......................................................................................... Pump Price (nominal ¢/litre).......................Price History................................Price History ........... 53 Figure 28: Vancouver ....................... 4 Figure 2: 1996 Average Prices/Margins ..................... 24 Figure 5: Canadian Retail Outlet Population ............. 24 Figure 6: 1995 Retail Outlets by Province ................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ......... Gross Product Margin .............................. 44 Figure 21: Gross Marketing Margin Elements ............................................Price History............................................................ 43 Figure 20: Ex-Tax Pump Price Elements ...................................................................... 66 Figure 35: Saint John NB ..................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .................................................................. 71 MJ ERVIN & ASSOCIATES i ................................................ 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.......................................................... 47 Figure 24: Outlet Volume vs........Price History........................ 34 Figure 15: Monthly Rack Prices: Selected Markets .................................................................................................................Price History .........List of Figures Figure 1: Pump Price / Margin Model............................................. 56 Figure 30: Regina ............................................................................. ex-tax elements ........... 16 Figure 3: 1996 Average Regular Gasoline Margins (56..................................... 49 Figure 26: Outlet Revenues..........Price History ......................Regional & Urban Groupings.Price History......................... Costs............Price History ...............................................................................................................................................................................................Price History ........................... 70 Figure 37: Charlottetown ............ 69 Figure 36: Halifax ..................................... 33 Figure 13: Monthly Gross Marketing Margins................................................................................................................................................................... 35 Figure 16: Monthly Demand vs....................... 54 Figure 29: Calgary ............. 25 Figure 7: Outlet Representation by Mode....................................................................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)...................................................................................................................... 50 Figure 27: Victoria ........... 58 Figure 32: Toronto ............................tax................................................................... 46 Figure 23: Average Annual Throughput per Outlet......... 48 Figure 25: Outlet / Volume Relationship ...............Price History...... 63 Figure 34: Montreal ................Regular Unleaded ................................ Income................................................................. 36 Figure 17: Study Market Methodology ....................................................................... 45 Figure 22: Petroleum Gross Product Margins ..........................................................Selected Goods & Services ..... 29 Figure 9: Annual Gasoline Price (Cents per Litre) .......................................................................................................................................................... 62 Figure 33: Ottawa ....................................................... 42 Figure 19: Pump Price ................................................................................................................................. 40 Figure 18: 1995 Average "Blended" Pump Price ......1988-1995 .................. 28 Figure 8: Outlet Representation by Service .

.....List of Tables Table 1: Downstream Sales Channels .............. 13 Table 2: Taxes on Regular Gasoline on December 31............ 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue................................ 51 MJ ERVIN & ASSOCIATES ii ....................... 15 Table 3: Selected Study Markets ................................................................................................................. 1996 ....................................................................

and ex-tax pump prices.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.3 ¢ 28. together with a separate review of the refining sector.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.8 ¢ TAX 28. each with unique MJ ERVIN & ASSOCIATES iii . and a foundation for effective policy development.2 ¢ 24. These prices are determined in a competitive marketplace.4 ¢ 19. This study. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.5 cents per litre on the sale of regular gasoline in a typical major urban market.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. represented by crude.1 ¢ 5. dealer income. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. rack.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. supplier costs and profitability. the Canadian retail marketing sector realized an average gross product margin of 3. and the Canadian Petroleum Products Institute (CPPI). Price competition occurs at three distinct levels in this industry. Natural Resources Canada (NRCan). 1996 Average Prices and Margins .5 ¢ 0. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.

500 retail outlets were in operation in Canada in 1995. From 1986 to 1995. nine of the past ten years. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. demand and other competitive factors existing at the time. and declined by 10 cents per litre measured in constant dollars.000 in 1989. are examples of ways in which outlet petroleum sales are augmented by other revenues. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). this study focuses on the retail gasoline sector. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. compared to about 22. While each of these marketing channels operates in a competitive environment.dynamics. which potentially allow for reduced margins at the gasoline pump. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Approximately 16. due to its prominence in the public and media domain. and the traditional automotive service bay. well over half of all outlets in Canada operate as lessees or independents. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). and accordingly. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. car wash. Dealers have a variety of relationships with their supplier. Convenience store. The resultant margins are therefore a reflection of the state of product supply. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv .

while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. From 1991 to 1996. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. As a result of these trends.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. This has both resulted in. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.crude) 5¢ Marketing Margin (retail . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. and has been a result of several factors including: • • • improved refinery utilization and efficiency. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . MJ ERVIN & ASSOCIATES v .The “tax-included” nominal pump price increased over this same period. however. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. as a consequence of refinery plant rationalization (closures) and a modest demand increase.

rural markets. were selected for a detailed review of outlet economics. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. and one by one. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. 19 markets representing a broad range of conditions. several “outside variables” (product taxes. With the participation of several CPPI member companies. When petroleum gross product margins were compared to their corresponding outlet throughputs. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. A wide range of petroleum gross product margins were evident. to derive 1995 average petroleum gross product margins for each of the 19 markets. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This provided for market-bymarket and regional comparisons of key competitiveness indicators. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. That such a relationship should exist was not surprising. wholesale product cost and freight charges) were isolated from the pump price. although this study provides an independent confirmation of this.Comparison of Canada. MJ ERVIN & ASSOCIATES vi . but also had significantly higher throughputs per outlet. This was integrated with selected NRCan price data. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. With few exceptions.

000..000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. and in major vs.000 Volume (litres) 4.000.000.000 3. corporate charity.6624 1. These costs would include salaries of marketing representatives and management. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. sales processing. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. and/or distributed to shareholders. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000 2. revenues from ancillary operations (eg: convenience store. and his personal labour investment.000.000 5. brand advertising. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. not poor competition.• Smaller markets performed as competitively as larger centres.000.000 6. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000. etc. head office and regional office overheads.6634Ln(x) + 76. Consequently. which reflects his investment in the outlet. an additional goal of this study was to undertake a comparison of outlet profitabilities. This study showed that an average outlet net revenue in the 19-market study group was about $70. the residual revenue is available as profit to be re-invested into retail operations. supplier profit: after the above costs are allocated. smaller markets. of which gross product margin and throughput are only two of several factors.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .962 R2 = 0.

Although an objective measure of competitiveness is elusive. Average Outlet Income (before marketing overhead costs) BC/PR $300. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000 $100. 1.000 $200. at 1995 prices.000) $(250. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000 per year.000 vs.$154. $61. and that petroleum sales revenues alone. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000 $50. for which this study had no specific data. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000) $(350. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. suppliers likely incurred a net loss on outlet operations in 1995. were insufficient to cover outlet costs.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000) $(100. by all objective measures available to this study. The Canadian retail petroleum products industry.000) $(300.market study group.000 $250. respectively. distant outlets are clearly higher than those associated with concentrated urban markets.000 $150.000) $(150. after allowing for estimated dealer profit and supplier overhead. Despite this difference. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000) $(200. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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if Canadian average pump prices were only one cent higher than they were in 1995. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . A wide range of petroleum gross product margins were evident within the 19market study group. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. Indeed. 8. 7. Also. Thus.• • • improving production efficiency through refinery plant rationalizations (closures). While these economics might appear to place this industry in a position of poor viability. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. these findings clearly show that pump price increases are ultimately linked not to increased profits. regardless of size. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. virtually all of the 19 study markets exhibited similar levels of competition. That such a relationship should exist was not surprising. not excessive profits. and the associated industry initiatives which are ongoing in nature. Industry profitability is extremely sensitive to very small changes in pump price. Thus. Nevertheless. although this study provides comprehensive evidence of this. When plotted against the margin-volume model. in the long term these fluctuations are likely more reflective of market restorations. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. and in turn. but to increases in underlying rack prices. When these margins were compared to their corresponding outlet throughputs. Outlet throughput is a key determinant of inter-market pump price differences. Also. this industry sector would have realized profits of unprecedented proportions. had petroleum margins which were commensurate with average outlet throughput for that market. assuming all other costs were unchanged. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. most markets. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). serve as perhaps the most significant indicators of competitiveness in the downstream industry. Both the downward trend in margins. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. based upon an assumed posted rack price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. despite the predisposition of many observers to use them as such. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). crude costs. most outlets used in the 19-market study represent major integrated oil companies. Thus. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year.

High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. While competitiveness in most smaller markets was shown to be as active as in larger centres. In suggesting this approach however. in order to build upon the findings in this study towards a full understanding of the dynamics at work. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. which could actually inhibit competition. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. The costs of most consumer goods in smaller. there are three points to consider: • • In very small markets. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. poor outlet throughputs were generally the predominant factor.5 million fewer litres of gasoline than a group A (major centre) station. A full-serve retail gasoline outlet typically employs 3-5 staff. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. MJ ERVIN & ASSOCIATES xiii . thereby improving petroleum volumes and ancillary revenues at the remaining sites. the solution would be to encourage some dealers to exit the market. The loss of employment represented by a station closure may be of some concern to smaller communities. it would seem that if local government in smaller markets were interested in lowering pump prices. according to the margin-volume model.product margins than larger markets. reducing the number of outlets may also reduce the number of competitors. • • At first glance. This created some economic pressure to sell product at a higher pump price. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. more isolated markets are generally higher than in larger centres. and this study showed that gasoline prices were no exception. other factors exist which contribute to relatively high margins and prices. reduce pump prices. Smaller. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. which should. isolated markets face particular challenges: although found to be highly competitive. 9. average pump prices were relatively high.

MJ ERVIN & ASSOCIATES xiv . Also. is viewed as an agency which exists to the benefit of industry and consumer alike.10. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). This study proposes rather. The federal Competition Bureau for example. the Halifax market. and in turn. characterized by narrow product margins and relatively flat pump prices. 11. The historical record is clear however: since deregulating pump prices. car wash. direct regulatory interventions may have an adverse effect on competitiveness. and the perceived effect on their markets. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). that where a healthy competitive climate exists. and likely others in Nova Scotia. Convenience store. is well beyond the scope of this study. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. as marketers find even more innovative ways to attract market share. depressed petroleum revenues. As these findings show. does not appear to benefit in consumer terms. the degree of price competition in the retail petroleum has in effect. This competition then. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Retail ancillary operations are a critical element of petroleum price competition. has seen a decline in pump prices relative to other Canadian markets. will likely preserve a highly competitive petroleum market. many national and local environmental regulations exist for good cause. Charlottetown. possibly to the detriment of the consumer. and as such. is both the cause and consequence of increased activity in ancillary operations. and the traditional automotive service bay. are an acceptable limitation on pure competition (Finding 8). as it does in the Canadian petroleum marketing sector. sometimes below that of outlet operating costs. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. under the current PEI regulatory structure. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector.

Develop cooperative industry research into marketing sector competitiveness issues. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. not inhibit. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. using Canadian and foreign selected markets. This should be in the form of a quarterly summary of price trends and related measurements. in a simple format designed for consumers and legislators. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. margins and competitiveness factors. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. • • MJ ERVIN & ASSOCIATES xv . and the nature of competitiveness influences. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response.1. and the converse image held in much of the public domain. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. along the lines of the model used in this study. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Public perception measurement. using Canadian and foreign selected markets. 2. Improve public understanding and awareness of competition in the petroleum marketing sector. A regular comprehensive competitiveness evaluation. petroleum marketing competitiveness. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.

• * * * Better understanding of this industry. by industry. using Canadian and foreign selected markets. consumers. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and in particular. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and regulators alike. and issues/opportunities facing such markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. MJ ERVIN & ASSOCIATES xvi .

. and Industry Canada was convened to undertake this project.to analyze the rack to retail market and the market structure for refined petroleum products. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. and MJ Ervin & Associates was selected to undertake the “rack to retail”. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. or even communities within the same region.to determine the key factors which drive competitiveness in specific markets.to better understand the competitive opportunities and challenges..to help the industry cope and to enhance competitiveness. and that issues and challenges be identified so that conclusions and recommendations can be made “.. . A working group represented by Natural Resources Canada (NRCan)..” MJ ERVIN & ASSOCIATES 1 .to provide a sound database upon which more effective policy decisions can be made. The SCF laid the foundation for supplementary studies.to draw comparisons with nearby USA markets.Introduction Background Canada’s petroleum refining and marketing sectors. which comprise the “downstream” oil industry. Specific purposes of this study would be: • • • • “. and in the process... the Canadian Petroleum Products Institute (CPPI). more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. and a challenging array of potential environmental initiatives.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. or petroleum marketing portion of the study. . and regional differences which face the petroleum products retail industry. competitive pressures from US and offshore refiners.... and in comparison to the Canadian national average and nearby USA markets”. to name a few. In 1995. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. Project Objectives The working group established as the primary objective of this study “.. face a number of challenges: a poor public image. leading to more effective policies and reduced uncertainty for future investment.. and . region by region across Canada.. including a regional.

margins and demand patterns over the past several years. Supporting data to these charts can be found in Appendix II. and a foundation for effective policy development.The study meets these objectives. due to the considerable data gathering difficulties that such an approach would entail. from which some important findings are made. Part C: Historical Trend Analysis provides an overview of prices. in Appendix I. Findings are stated in bold and are summarized in part E of this report. undertaken as part of this project to: • make a more detailed examination of price. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. • Part E: Conclusions and Recommendations summarizes the study findings and. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. and the effect of competitiveness on each subsector. Specific comparisons of specific Canadian and US consumer markets were not made. presents conclusions and recommendations which arise from the study findings. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Many of the findings in this report are presented in graphical form. and in order to provide insights into the range of competitive dynamics that can exist. through a multi-faceted approach. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . it provides a comprehensive tool to understand the dynamics of this vital and complex industry. Unless otherwise stated. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. or which have a specific meaning in the context of this report. Ultimately. The study does provide comparisons with US markets on a national level of detail. It also relates consumer demand patterns to pump price fluctuations. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. Part D: Selected Market Study presents the findings of a diverse 19-market study. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation).

NRCan. Finally. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Suncor Inc. Environment Canada. facilitated some of the data gathering needs of this study. We gratefully acknowledge these companies.• Industry Canada. MJ ERVIN & ASSOCIATES 3 . and provided critical guidance and feedback at several key stages in the process. Suncor Inc. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Consumers Association of Canada. Petro-Canada. Imperial Oil Ltd.. Shell Canada.. and Industry Canada. through Bob Clapp. The Canadian Petroleum Products Institute. and also participated in the steering committee. and their 481 retail associates whose outlet data was used in our analysis. and Shell Canada.. These included: Canadian Tire Petroleum. Ministère des ressources naturelles du Québec. • • Several organizations participated in two key review sessions. chaired the steering committee. through Maureen Monaghan and Huguette Montcalm. assisted in securing the support and participation of member companies in the selected markets phase of the study. Natural Resources Canada. including Ultramar Canada. Petro-Canada. CPPI. Ontario Ministry of Environment and Energy.. for their assistance.

as they are in Figure 1. In fact. principally of motor gasoline. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. unlike many consumer products. texture. And. multifaceted industry. and serves to explain several factors that together determine retail gasoline prices at any given time.price . These relationships can be modeled. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . the particular quality of gasoline which is of most interest to consumers is not its colour. as this study shows. its price. or taste. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. most Canadians relate to this industry in one specific way: as consumers. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. but simply.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. It is this particular feature of petroleum products . The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. Yet. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast.

an understanding of the term itself is necessary. While both perspectives are valid. MJ ERVIN & ASSOCIATES 5 . but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. and in fact inextricably related. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. Each margin is quantified by its defining prices. While this term is often associated with the phrase “profit margin”. “competitive” may be synonymous with “viable”.or margin . evaluating competitiveness is therefore a partly subjective process.Many of the terms introduced and explained in this section are used extensively throughout this study. Ultimately however. So defined. it is important to define the term “margin”. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. gross margin represents revenue only. Before examining each of the model elements. consumer perspective.from the total pump revenue. A consumer however. margins are squeezed or expanded accordingly. this study examines competitiveness from the latter. any operating expenses must then be considered before making any determination of profits. Gross margin is simply the difference between two price points. objective measurement for competitiveness. each essentially taking a share1 . is more likely to equate the term with “value for money”. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. (implying that the stated margin represents net income or “profit”). this study’s use of the term relates to gross margin. these stakeholder revenues are derived from the revenue from the retail sale. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). From an industry perspective. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.

as competitors seek to attract market share through lower prices.” Price Competition in the Oil Industry In order to assess competitiveness. if market conditions allow a sufficient number of players to remain profitably engaged.. in the sense in which it is something in the public interest. 1986: “Competition may mean very different things to different people.. Conditions for a competitive market can be deemed to exist when: • • more than one. represents a process by which prices are set. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. Accordingly. a universally acceptable definition of competitiveness is elusive. improving efficiencies. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. and ideally many entities offer the same or similar products (brand variety). Competition can only be sustained therefore. provide some means for comparing the type and to some extent. is the only real option in the long term. the result of price competition is reduced profit. reducing costs. Price competition. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers.Unlike many business or economic concepts. Since a competitive market effectively limits the price option. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. An effective functioning of markets also permits smaller competitors to expand if they meet the test. More importantly. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . this usually requires a reasonable number of competitors. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. the degree of competition within a market. Inevitably. and unless care is taken to use the word precisely. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. it can frustrate communication and obscure analysis. in order to maintain some level of brand variety. Simply put. Technological change and innovation are the large levers of competition in industry. one must ask how marketers compete. or in other words. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive).” “. competitors can either restore higher prices or reduce costs. and the entry of new competitors and new ideas. To achieve this. The actions by business rivals place an upper limit on the prices a firm can charge for its products.

in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. The converse notion that the industry establishes a “should be” margin. It is also important to stress that the market ultimately sets rack and retail pump prices. Given the commodity nature of petroleum products. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. particularly in the crude (upstream) industry and refiner sector. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. commonly known as the “marketing mix”1. the raw material from which gasoline is made. Jerome McCarthy. and are generally known as integrated oil companies. and as will become more evident in this study. competition in the crude and rack markets deserves some mention. The dynamics of upstream and refiner competition are major studies in themselves. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. and in retail markets. the most effective of these as a competitive tool is price. whose main activity is the exploration and development of crude oil. 1971). Price. Within the broad context of the oil industry. • Thus described. which in turn defines the margins. and are beyond the scope of this study. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. which in turn defines a proper market price. is false. the “oil industry” consists of two distinct industries: the upstream industry. Ill.: Richard D. or four P’s: Product. most Canadians relate more in terms of retail gasoline marketing. p. some organizations have operations in two or more of these markets. In fact. (Homewood. Irving. 4th Ed.44 (1st Dec. and the downstream industry.the variables at their disposal. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. A refiner in Toronto may well compete with a refiner in Buffalo. Basic Marketing: A Managerial Approach. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production.. and Promotion. whose main 1 E. so a brief description of these. New York. Nevertheless. MJ ERVIN & ASSOCIATES 7 . Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. 1960) 2 Although distinct. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. in rack markets. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. the geographic scale of competition is an important consideration. Place.

it is probably sufficient to say that. While this study focuses on the downstream industry (and in particular. our crude prices rise and fall according to price benchmarks established far beyond our own shores. rather than a fixed value. alongside major producing countries such as Saudi Arabia. Infrastructure The upstream oil industry encompasses a broad range of operations. which gives an accurate portrayal of month-to-month crude price fluctuations. gasoline grade. In providing historical comparisons of crude to rack/pump prices. and refinery production methods. which finds and produces crude oil . production. from the exploration for potential crude or gas reserves. that is to say. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. its marketing operations). Although this industry is not the focus of this study. and the delivery and sale of these products to the consumer. in several commodities trading centres around the world. consequently. MJ ERVIN & ASSOCIATES 8 . drilling. Canadian producers have virtually no influence over world crude prices. The upstream industry’s crude price is represented in Figure 1 as elastic. which it does on a continuous basis. as a minor contributor to the world crude supply. implying that it fluctuates. Crude oil is a commodity which is traded in a global marketplace. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. and in the open market structure that exists in Canada.activity is the refining of crude oil into petroleum products. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. due to variables such as crude quality. Within the scope of this study. Canadian producers are known as “price takers” rather than “price setters” of crude prices. and transportation of crude oil to the refinery plant.the raw material from which gasoline is made. Canadian producers must compete to sell their production to refiners. it is important to examine its relationship with its neighboring downstream industry.

personnel. is the provincial government. is called the refinery. its predominant feature is the plant facility which. put simply. This sector acquires crude oil. and some attention to the refiner sector is therefore given here. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. who manufacture petroleum products from crude oil. manufactures a range of refined petroleum products including gasolines. As is typical of many manufacturing organizations. crude is only one of several factors that influence pump prices. A modern refinery is a sophisticated work of engineering. From this revenue. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. oil producers must explore for potential reserves. and pay out royalties to the resource owner. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study.1 cents per litre. maintenance. MJ ERVIN & ASSOCIATES 9 . drill for. diesel. was 19.While some suggest that the price of gasoline should rise and fall exactly with the crude price. which in oil producing provinces such as Alberta. involving energy. heating fuels. and marketers who. in the petroleum sector. As a general measure: Finding 2: 1996 average crude price. In addition. The focus of this study is on the marketing sector of the downstream petroleum industry. day-to-day plant operations are cost-intensive. as a factor of the regular gasoline retail pump price. and hopefully realize some production. buy refined products from the refiner and sell them to the end-use customer. and from this feedstock. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. or roughly 34 percent of the pump price. and lubricants. and numerous safety and environmental safeguards.

only rack price information is readily available in the public domain. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. the gross refiner margin is elastic. transfer price . This margin provides for plant operating costs as described above. In fact. being squeezed or expanded between these two price points. 1 Dealer Price is not included here. contract price .the price charged for immediate supply on an “as available” basis. For a competitive rack market to exist. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. In fact the refiner typically pays a higher price than the benchmark crude price. since the market-driven rack price provides an objective. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. Since both crude and rack prices fluctuate according to market forces. and accordingly. reflecting the cost of transporting the crude from the producing region to the refinery plant. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. some clear competitiveness indicators exist. The existence of rack price in a given market is not of itself. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. indicative of a competitive wholesale rack market. they use rack price as their basis. which can be broadly categorized as follows1: • • • rack price . many of which do not have integral refineries.Price/Margin Model Elements For simplicity. there would be little or no market-driven competitiveness in the refiner sector. which provides an independent and objective determination of rack-based gross refiner margin. the gross refiner margin is the price at which the refiner sells its refined product. While refineries are always rack price points. external measurement of the current market value of a particular petroleum product. refiners sell their product under a variety of arrangements. Contract and transfer prices are not openly shared. as they relate to negotiated. less the price at which it bought its raw material2 (rack price minus crude price). not the refiner sector. Wholesale volume data is not readily available on a market-specific basis. as this price point exists within the marketing sector. In simple terms. Although contract and transfer prices are distinct from rack price. which may cause Gross Refiner Margin to be slightly overstated. confidential terms between the seller and specific buyers. Of these three refiner prices. representing major Canadian population centres.this is the “internal” price charged by a refiner to the marketing arm of the same company. For simplicity. but with no material effect upon the Gross Product Margin derivation. this model only uses the benchmark crude value. If for example. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. On a national basis however. the relative competitive strength of any given rack market is difficult to assess. and a return on the considerable capital investment in the plant facility.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. 2 MJ ERVIN & ASSOCIATES 10 .

These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). arises. Canadian refiners must therefore be price competitive not only with each other. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. In these cases of so-called “integrated” refiner-marketers. as there is no obvious market mechanism to regulate its setting. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. from any one of several regional refiners. The mechanisms that drive rack prices are more fully discussed on page 36. integrated refiner-marketers establish transfer prices at. many US and European refineries are in practice. even overseas. or close to. As shown in Figure 15 (page 35). and which supply petroleum to about one-third of all retail outlets in Canada1. for example. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. market-driven rack prices. who themselves do not refine petroleum products. 1 Based on Octane Magazine Retail Outlet Survey data. market-driven Rack (wholesale) pricing of petroleum products. would produce better than expected refiner income. petrochemical producers. In practical terms. In examining the structure of the Canadian refiner sector. due to the relatively small transportation cost. to so-called “independent” petroleum marketers. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. the question of the internal selling price. this limits a marketer to a relatively short range (perhaps 1. most refiners also participate in the marketing and retailing of petroleum products.for example. who compete for a share of this demand. to major industrial consumers. MJ ERVIN & ASSOCIATES 11 .000 km) for overland truck transport. potential sources of wholesale product supply for most Canadian non-refiner marketers. but with their US and European counterparts. Integrated Refiner-Marketers In Canada. in order to maintain realistic accountabilities within each of the two sub-sectors. but at the expense of marketing income. wholesale refined product is bought and sold across very large distances. but where pipeline or marine fuel terminal facilities exist. In practice. or transfer price. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . and in the case of gasoline.

as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. Wholesale Sales to a wide variety of customers. Marketing operations within this sector can be broadly classified into three elements. principally into commercial trucking operators’ vehicles. media and regulatory attention. • • MJ ERVIN & ASSOCIATES 12 . this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. trucking. gasoline price and competitiveness issues attract considerable public. in the minds of many consumers. each with its own distinct infrastructure. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. as a popular and relevant “window” on the petroleum marketing sector. home heating. and purchase at or near the established rack price. which “sets” the retail price of gasoline. farming. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. For this reason. including mining. It is this sector which has direct contact with the petroleum consumer and it is this sector. Within this industry sector. the most recognized element of the downstream oil industry. Retail Sales to the domestic motorist. or in the case of cardlock facilities.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and aviation. product is sold from a central facility. and who essentially deal directly with the refiner.

for example. one final element of the pump price model must be reviewed. as discussed. in smaller centres. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Before examining this sector in detail. MJ ERVIN & ASSOCIATES 13 . There are over 1. Sales to major industrial accounts. Sales to non-refiner petroleum marketers. to the motorist consumer. according to the contractual relationship between the supplier and the dealer. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. using delivery tank trucks. to the aviation fuel consumer. often delivered by pipeline or ship/barge. Sales of home heating fuels to residential furnace oil customers. Sales to spot buyers at posted rack price. There are over 850 cardlock outlets in Canada.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Direct sales generally do not involve any marketing sector infrastructure. heating fuel delivery is an integral part of a bulk sales outlet. such as product transport and/or storage. by delivery tank truck. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. and regular gasoline in particular. which is generally less than the rack price. These outlets usually have considerable inventory capacity. typically at the “rack point”. at a negotiated contract price. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales of aviation fuels at major and secondary airports across Canada. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. and usually supply customers by delivery to the customer’s own storage tank. usually involving some aspect of the marketing sector infrastructure. Retail outlets are operated in a variety of modes. Sales of petroleum products through bulk sales outlets. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are about 16. as principal elements of petroleum marketing operations. Sales to commercial and industrial accounts by the wholesale marketing sector.500 retail gasoline outlets in Canada.300 bulk sales outlets in Canada. In major centres dedicated Home Heat centres provide this service.

regardless of market conditions. typically made up of: • • • • a ten cent per litre federal excise tax.3 in Quebec) drop in the tax content. would include a roughly 0. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. The petroleum industry acts as a collector of these taxes. the tax content of retail gasoline in Canada has increased steadily over several years. tax content does fluctuate somewhat with pump price changes. for example. in a small number of markets. PST). 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. 1 Due to the application of GST (and in Quebec. provincial sales tax. the tax content of the petroleum price is essentially a pre-determined. municipal taxes. Table 2 shows the provincial tax content for retail gasoline. A three-cent drop in pump price. MJ ERVIN & ASSOCIATES 14 .6 cents per litre (Canada 1996 10-city average). and seven percent GST. If the pump price decreases for example. which amount to 28. or roughly 50 per cent of the pump price. stable amount. As part C of this study shows.2 cent (0.

0 15.5 12. Provincial Tax 11.0 9.0 4.5% sales tax applied to the GST-inclusive pump price.0 14.0 10.5 3.6 3.2 24.3 Federal Excise Tax 10.0 28.5 cents was introduced in the Montreal and surrounding area in 1996.8 4.0 10.0 10.6 22.1 25.1 32.2 24.0 10.7 30.7 3.4 3.7 18.6 3.0 10.5 14.0 11.3 20.0 10.8 note 1 note 2 An additional tax of 1.7 13.5 cents and 4.0 10.2 10.2 cent per litre pump tax. All Quebec gasoline sales are subject to a 15. An additional pump tax of 1.Table 2: Taxes on Regular Gasoline on December 31. plus a 6.0 10.6 25. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 10.6 3.0 3.5 Total Tax 24.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 10.0 10.3 27.0 16. MJ ERVIN & ASSOCIATES 15 .0 28.3 10.0 27.5 6.0 3.6 3.9 3.0 GST content (7% of pump) 3. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 10.

the brand supplier’s costs.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.1 cents per litre. some profit return for the shareholder. and potentially.5 cents per litre (after freight cost). based on regular unleaded gasoline. or 50.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.5 ¢ 0. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.3 ¢ 28. It also provides an overview of the industry in terms of several infrastructure parameters.1 ¢ 5. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).4 ¢ 19. Refiner operations realized 5.2 ¢ 24. This 1 Prices and margins reflect a Canadian 10 city average. to derive a representative value for regular gasoline gross product margin in Canada. The residual. Upstream operations realized 19. this section provides a view of the Canadian petroleum marketing sector. was available for product marketing operations. Figure 2: 1996 Average Prices/Margins . MJ ERVIN & ASSOCIATES 16 . or 34 percent of the pump price. 3. including retail outlet distribution. and the retail gasoline sub-sector in particular.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. namely the dealer’s costs and income.6 cents per litre. or 9 percent. operating modes.3 percent of the average regular gasoline posted pump price.3 cents per litre. and ancillary operations.8 ¢ TAX 28.

In 1996. In 1996. this is seen as a “non-core” business. is defined by the marketdriven price points of ex-tax pump price. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. Both refiner and marketing margins have been in decline over the past several years. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Freight MJ ERVIN & ASSOCIATES 17 . and is then transported to the retail outlet. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. Bloomberg rack price values were used as the assumed wholesale price. Based on the 1996 data. as part C will describe.3 cents per litre. and it is depicted in Figure 1 as a fixed cost element. for example) is sold/transferred at the current rack or transfer price. it falls into the domain of the marketing sector. In referring to marketing margins and product margins. The marketing sector then. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline.3 percent of the average urban price of regular gasoline in Canada. petroleum taxes accounted for 50. Freight cost does not typically fluctuate. As the product leaves the refinery plant. is the second of two elements of the downstream oil industry. and rack price. which in the case of retail gasoline. The gross marketing margin. and is often out-sourced to third-party common carriers. the finished product (gasoline. three key findings can be stated: Finding 4: Finding 5: In 1996.5 cents per litre. Although many petroleum marketers conduct their own freight operations.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. is usually the gas station. or “rack to retail” margin. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. was 3. See page 10 for further explanation. was 5.

and is therefore a poor comparative tool. petroleum marketers.8¢ Pump Price) Upstream Operations 19. Gross product margin is therefore defined as gross marketing margin less freight cost. an average gross product margin for regular gasoline in a major Canadian city was 3. together with gas station dealers. As represented in Figure 3. typical of any retail business. which are typically close to a wholesale rack point. Unlike most other retail enterprises however. but at an average cost of over $200. as it excludes the “outside variables” of tax.1¢ Tax 28. Figure 3: 1996 Average Regular Gasoline Margins (56. incur a variety of costs. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . and upstream/refiner margins.costs are generally less than one-half cent per litre in most major Canadian cities. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small.5¢ Product Operations Freight 0.6¢ Refiner Operations 5. freight.5 cents per litre in 1996.3¢ 3. Posted pump price includes all of these variables. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). rural markets experience higher pump prices than do larger centres.000 per outlet. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. as it represents 80% of all retail gasoline sales. This is a particularly useful measurement in comparing retail gasoline markets.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. • Product sales: Within this domain. storing and dispensing a product such as gasoline adds considerably to the operating cost.

” or four P’s: Product. additives. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline.44 (1st Dec. 1971). a number of factors preclude this type of strategy. Price competition has forced marketers to optimize outlet revenue. In order to measure competitiveness. Place. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. seasonal blends. Today. Basic Marketing: A Managerial Approach. 2 E. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. 1960) MJ ERVIN & ASSOCIATES 19 . In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. 4th Ed. or when comparing price levels between markets. marketers compete for the consumer’s choice of transportation energy (for example. expanded product/services offerings such as convenience items. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. 1 Diesel is another petroleum product sold at many retail outlets. Higher octane grades are more expensive than RUL. rather than the most places.retail gasoline sales respectively1. Although revenue from this product is factored into the study market economics in Part D. page 24). • Product In the past decade. but most consumers view gasoline as a commodity. Ill. but in 1995 was typically 5 cents per litre for midgrade. as gas stations proliferated. RUL prices are therefore most often cited when relating historical price trends. Price.. marketers have attempted with some success to differentiate their product offerings from other brands. marketers compete to be represented in as many and/or the best locations as possible. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. gasoline). Today. A portion of the market certainly responds to this type of competitive strategy. competitive strategy of this type focuses heavily on selecting the best place. p. and Promotion. will ultimately purchase based on price. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. etc. This study does not examine such a broad issue however. and the price difference between these grades and the RUL price is referred to as the grade differential. propane vs. it represents a very small percentage of total retail petroleum sales. Irving. one must ask how marketers compete. commonly known as the “marketing mix2.: Richard D. The grade differential varies somewhat from city to city. Simply put.). (Homewood. Place Typically. and 9 cents per litre for premium gasoline. Jerome McCarthy. and accordingly.

Promotion In the gasoline retailing sub-sector. and due to the already slim margins available to marketers. Consequently. Examples are: • prominently displayed prices . volatile prices . • • • While examples of all of these indicators are abundantly in evidence. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. and more importantly. this study examines the dynamics of price competition in considerable detail. Establishing an objective measurement of price as a competitiveness indicator however. • Price In most markets. free item with purchase or special price item with purchase.contrary to some public perception. Promotional activity seems to have decreased in the past few years. gasoline is viewed by consumers as a commodity uniform in quality and widely available. At its extreme. price has proven to be the most widely used competitive tool by gasoline marketers. This study presents an extensive historical and comparative analysis of pump prices. probably due to its relatively high cost.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness.while uniform pump prices are sometimes cited as evidence of industry collusion. is less clear. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. caused by price competition. due to the largely commodity nature of petroleum product. their subsector margins. In this context. MJ ERVIN & ASSOCIATES 20 . in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. gasoline is a commodity. fluctuating pump prices are a significant indicator of robust competition among marketers. volatile pricing manifests itself in the form of a price war (see below). uniform prices . low prices and/or margins. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. and therefore “trades” within a relatively narrow price range.• • closure of non-viable outlets. As such. Examples of promotional competition are: • • • brand identity gasoline discount coupon. price clearly remains the predominant competitive tool used by Canadian gasoline marketers.

The other dealer has little choice but to quickly match. its effect is to restore some measure of the dealer margin. or even undercut the competitor’s lower price. or when prices rise or fall apparently in unison. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. adjacent dealers. facilitated through street price signs. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. the relationship between the supplier and dealer is generally as described on page 25. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. or even being squeezed to zero . bypassing the higherpriced outlet. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. The effect of this upon the gross marketing margin is obvious: it is squeezed. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. Price Support In times of “normal” pump prices. the supplier may temporarily intervene. are indicators of a competitive market. Pump price signs are an ubiquitous feature of the retail gasoline industry. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. While this support may take one of several forms. To understand the phenomenon of uniform pump prices. Finding 7: Price uniformity and price volatility. In the case of lessee or independent dealers however. competitors will likely match this price. one must adopt the perspectives of both consumers and competing. If the posted price increase is too high. for example). Pump prices therefore tend to move uniformly within a very short time. 1 This does not occur at company operated or commission outlets. competitors may not follow. since they too must restore their gross product margins to sustainable levels. but to competitors. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. the wholesale rack price. who then react quickly to the change.where the ex-tax pump price is equal to. since there is no “dealer margin”. If one dealer decides to reduce pump prices (by two cents. MJ ERVIN & ASSOCIATES 21 . or even less than. obviously at the expense of the supplier margin. in order to maintain a reasonable market share. and provide to the dealer what is commonly referred to as price support.When pump prices are uniform. assuming that the rack price is unchanged. This is a misconception. the effect on many consumers is immediate: they will drive into that station. When this occurs. in an attempt to gain market share. Whether through falling pump prices or rising rack prices.

While this study does not intend to undertake a detailed review of the effect of the Act. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. is beyond this study’s scope. An examination of the effect of the Competition Act. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. and a brief discussion of this case appears in part D. the Bureau found that there was no evidence to support these allegations1. resulting in 9 convictions. Following a year-long investigation. A review of historical retail pump prices in the Halifax. There are few current examples of direct government intervention in the pricing of petroleum products. the petroleum marketing sector has been the subject of several inquiries at federal. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. but reverts back to the dealer when the support arrangement is ceased. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices.Under the provisions of some price support mechanisms. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. control over retail pump price effectively reverts to the supplier. These cases have largely involved local dealers and/or isolated incidents. provincial and even municipal levels. More recently. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. In addition. which is administered by the federal Competition Bureau (Industry Canada). Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. or of direct government intervention in marketing. In addition. however. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. 1997 MJ ERVIN & ASSOCIATES 22 .

500 retail gasoline outlets across Canada. Many smaller retail owner-operators. Conversely. sales of gasoline through the roughly 16. to some degree. but exist to meet other important societal needs. or incentive for. is in part. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. a competitive climate. higher pump prices. accounts for about 37% of all refined petroleum demand in Canada. As a product group however. exit from an non-viable market. creates an obstacle to. and consequently. for safety and environmental protection. it is clear that government policy plays an important role in facilitating. promotes or limits market-driven pump prices. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). and at least some of this capital cost is regulatory compliance-driven. So defined. These regulations clearly exist to the benefit of all. accounting for 41% of all petroleum demand. It is important to acknowledge that many regulations affecting the retail gasoline industry. This issue is discussed more fully in part D. and is the single largest market for gasoline products. particularly in smaller population centres. as outlined above. or inhibiting. Retail gasoline sales. accounting for roughly 88% of all gasoline demand. The high cost of building a modern retail gasoline outlet for example. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. inhibit competition. in the form of standards for the decommissioning of retail petroleum sites. MJ ERVIN & ASSOCIATES 23 .Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. entry into an attractive market. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. it is the single largest one. that is. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. or incentive for. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. one can cite examples of regulatory obstacles to exit from the retail gasoline market. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. creating a need for higher margins. A practice. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs.

7% Lube/Grease 1.9% Diesel Fuel 22.2% Retail Gasoline 37. nor is there any federal or uniform provincial enumeration of retail gasoline outlets. This survey accounts only for major established retail networks . as shown in Figure 5.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This study provides an estimate of the actual retail outlet population.2% Propane /Butane 2.it has no practical means to enumerate each and every outlet.9% PetroChem Feedstocks 5. Figure 5: Canadian Retail Outlet Population .7% Light/Heavy FuelOils 14.6% Other Gasoline 4.3% Total Sales Volume: 84.2% Other 0.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Asphalt/Coke 4.

and this is of some importance with respect to the matter of prices and competition in this sector. exist between retail dealers and their suppliers. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. who manages the day-to-day operations at the retail outlet. the retail outlet is owned and operated entirely by the product supplier. The supplier. or modes.The estimated number of retail outlets in Canada has declined from 22.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. The principal dealer and attendants are salaried employees of the supplier. Distribution of these outlets by province (Figure 6.000 outlets in 1989. to about 16. as owner of the product. using Octane counts only) is roughly equivalent to population densities. as one might expect. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. and usually owns the brand name seen at the retail outlet. and the dealer. Several possible relationships. controls the setting of the pump price.500 in 1995. and all inventory and revenues belong to the supplier. who holds initial title to the refined petroleum as it leaves the rack point. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 .

the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . supplier salary from supplier. the supplier retains control of the retail pump price. the outlet facilities and petroleum inventory is owned by the supplier. Control of Pump Price Dealer Compensation supplier a commission from the supplier.sub-component margins .the entire gross product margin accrues to the brand supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. The dealer in turn hires attendants. but the outlet operator (“dealer”) is compensated by a commission payment. based on pump sales volume. who pays all outlet operating costs. Since the supplier owns the petroleum product at this type of outlet. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. and pays them from his commission revenue. The “dealer” is in essence. usually based on cents per litre of petroleum sales. an employee of the supplier supplier supplier typically the dealer.

This dealer margin is defined as the pump price (ex-tax). since it is predicated on contractual arrangements between the dealer and the supplier. and sells at the posted pump price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and has control over the retail pump price. not the supplier. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. This Dealer Price. MJ ERVIN & ASSOCIATES 27 . can vary considerably from one supplier to another. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition.product from the supplier at a “Dealer Wholesale” price. The margin between these two prices is the dealer’s gross revenue. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. less the Dealer (wholesale) Price charged by the brand supplier. dealer-established retail price. and sells at the posted pump price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. unlike rack or pump prices. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The dealer pays most or all of the expenses associated with operating the outlet. the retail facilities are owned by the dealer. and means of compensation supplier.

Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. some general figures are mentioned here. or Imperial Oil). This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. The remainder represent one of over 50 different marketer organizations. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. who themselves establish pump prices. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. during a price war) as previously described. Petro-Canada. virtually none of the major integrated outlets are company operated. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. MJ ERVIN & ASSOCIATES 28 . and fully two-thirds operate as lessees or independents. 1 Unless the dealer is under a price support arrangement (for instance. In addition.

Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . ancillary service has had the consequence of subsidizing the pump price of gasoline.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. These improved outlet throughputs have provided for improved petroleum revenue potential. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. has had a profound effect on the retail gasoline marketing sector. Improved outlet revenue from ancillary operations has caused. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. In effect. Most ancillary services are operated by the dealer/lessee. In fact. average annual throughputs ranged from under 1 million litres in smaller population centres. more fully described in part C. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. which in part has led to a reduction in retail product margins. these study findings show that this can vary widely from market to market.5 million litres. and is a result of. Canadian throughputs have dramatically improved in the past several years .While an average outlet throughput may be in the order of 2. to over five million litres in major markets such as Toronto. feature both a large-area convenience food store and a modern car wash facility. Many outlets have more than one ancillary offering: many “flagship” outlets for example. Based on a sampling of outlets surveyed in this study. Figure 8 depicts the Canadian representation of several key ancillary services. reduced petroleum margins.

prices are for regular unleaded (RUL) gasoline. would be somewhat higher. Since rising prices are common to most consumer goods and services. This shows that pump prices have increased in nominal terms. As such. An “all markets” average. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. many utilize terms which are explained in part A. Since 1 Data is not regularly collected on smaller markets. MJ ERVIN & ASSOCIATES 30 . Regional and market-to-market comparisons are presented in greater detail in part D. and with which the reader should be familiar. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. particularly around 1990. the “Canada average” price reflects an average of urban markets only1. using a Canada 10city weighted (by provincial demand) average. when the Persian Gulf War caused crude prices to increase significantly. mainly using Canada average values. as can be seen in part D of this study. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. While some of the presented findings are selfexplanatory. including smaller markets. an examination of the specific historical record of gasoline prices is useful. Unless noted. This part examines broad trends in several areas.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector.

as defined in part A of this study. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. as in Figure 10. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). It also depicts the associated margins. ex-tax equivalent prices. When compared to other consumer goods. Figure 10: CPI Index Comparison . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. MJ ERVIN & ASSOCIATES 31 . nominal pump prices decreased. and relative crude cost. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. In constant dollars. retail pump prices were about 7 cents less in 1995 than they were in 1986. When pump prices are reduced by the amount of tax content. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995.1990. rack price.

nor do rack prices exactly follow crude costs. then one might expect margins to be quite constant over time. as Figure 11 shows. which in turn. MJ ERVIN & ASSOCIATES 32 . are principally a reflection of changes in the underlying price of crude oil. as the next section shows. and the rise in the tax content. the downstream industry operates on a “cost-plus” basis. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. which are defined by the price points. Figure 12 shows that industry margins have not been constant over time. it simply passes on a fixed cost margin to determine the “correct” pump price. It is important to state that pump price changes do not occur in exact lock-step with rack prices. it is also useful to examine the behavior of margins. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as might be suggested. In fact. and in fact have displayed a declining trend over the past six years. as shown in Figure 12. due to additional market factors which affect pump and rack prices at any given point in time. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. If. that is. and have risen slightly since 1994. the presence of these additional market factors have operated to the benefit of consumers. Margin History While Figure 11 provides an indication of key price trends.

MJ ERVIN & ASSOCIATES 33 . emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. The decline in refiner and marketing margins has both resulted in. 1 In fact. this upward trend is not attributable to “downstream” refiner or marketing sector margins.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. and has been a result of. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . the actual fluctuation is much more pronounced than shown. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. A more thorough discussion of specific market factors for these and other centres appears in part D. since the chart is based on monthly averages. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase.crude) 5¢ Marketing Margin (retail . while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. not weekly or daily data. the gross marketing margin can fluctuate quite significantly1. This shows that on a monthly basis. In particular. as local competitive factors act to self-regulate pump prices. several factors. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. compared to the Canadian average. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. Finding 13: From 1991 to 1996. which have both shown a consistent decline throughout the period 1991 to 1996.

Figure 13: Monthly Gross Marketing Margins. This difference accounts for most. or even less than. is presented in Figure 14. with and without tax. US pump prices. US Price History The retail gasoline tax structure in Canada is vastly different than the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. Canadian pump prices have been roughly equal to. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . for several years. this is wholly attributable to the difference in taxation. This shows that. A comparison of Canadian and US regular gasoline pump prices. On an ex-tax basis. although Canadian pump prices in urban markets are clearly higher than in the US. if not all of the difference in pump prices between Canada and the US. resulting in significantly higher Canadian gasoline prices.

Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. This would be a useful area for further research.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Canadian ex-tax pump prices were historically somewhat higher than in the US. RFG has not been introduced to Canadian markets. which is reflected in US average pump prices. both a cause and an effect of improved throughputs and ancillary revenues as previously described. From this it can be seen that Canadian and US rack prices. • Although this study shows that on an ex-tax basis. as a result of outlet closures (see Figure 5. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. have improved considerably. While these trends have also occurred in the US. Prior to 1994. Figure 15 compares these values for selected Canadian and US centres over a period of several years. trading at any given time within a relatively narrow (about 2 cents per litre) range. page 24) and somewhat increased demand. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . when compared on an ex-tax basis. largely as a result of two factors: • Canadian marketing margins have decreased in this period. This is no longer the case however. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Canadian outlet throughputs (although likely still less than those of the US). behave in a very similar fashion. and moving up or down more or less in unison.

any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 34¢ 2. compared to average ex-tax regular gasoline pump price for the same period. Demand vs. As non-refiner marketers attempt to secure a supply of this diminishing inventory.300.100.000 2. and prices tend to fall. Yet in the latter half of each year.500.000 1.000 2.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . conditions begin to favour a “seller’s market”. a “buyers market” develops. increasing significantly every spring. or indeed anywhere. Gasoline demand exhibits a very regular seasonal pattern. and as would be expected in any commodities market under these conditions.900. as demand ebbs and inventory improves. of motor gasolines from 1991 to 1996.700.500. or sales. Price History Figure 16 shows the history of Canadian gasoline demand. not only in a given market. the price tends to be bid upwards. Pump Price (nominal ¢/litre) 3. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). Figure 16: Monthly Demand vs.700. Simply put. but in fact across the North American continent (US demand follows a similar pattern).000 2. and falling in the latter half of each year. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 2.000 24¢ 1. albeit less distinct pattern. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. rising and falling closely in step with demand.900. Gasoline price exhibits a similar.100.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 1.

competing to meet their own needs. the essence of a free market economy. their related product costs and margins. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.3%. which ensures a competitive product price for buyer and seller alike. pump prices have increased due to a significant rise in crude costs in this period). and product taxes which add to the consumer price of gasoline. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. Figure 16 shows that from 1991 to 1995. All of the findings suggest that. On a long-term basis however. in that prices have fallen. so do prices. has operated in a highly competitive environment. as evidenced by declining industry margins. The traditional supply-demand model predicts that when demand rises. despite a rise in demand. while world crude prices and Canadian taxes have generally increased over the past several years. MJ ERVIN & ASSOCIATES 37 . and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. This part of the study presented a number of historical views of retail gasoline prices. which consists of the refiners and marketers of gasoline and other petroleum products. demand rose approximately 8. gasoline prices have not followed the traditional model. while average ex-tax pump price declined by 14% (since 1994. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. a feature of most marketregulated commerce. This is of course.Whether in the spring or the fall. the downstream petroleum industry.

etc. and pump prices alone provide very little opportunity for “comparability”. A number of factors such as taxes. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. MJ ERVIN & ASSOCIATES 38 . although one was subsequently dropped due to insufficient submitted data. ancillary revenues. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. and in order to provide insights into the range of competitive dynamics that may exist. play a role in a market’s pump price. is useful in providing broad overviews of industry price and margin trends. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. freight. • Methodology Selection of Markets A number of markets were selected for the study. These “outside factors” tend to obscure the more relevant aspect of pump price. there is no regular monitoring of pump prices in smaller centres.. outlet volumes. outlet costs. Nineteen markets were therefore adopted for the study (Table 3). and a more detailed examination of price. namely product margin.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C.

and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500.and consequently competitiveness . member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. and Group B markets less than 500. To this end. 2 Depending upon the outlet mode.Each market was classified according to regional affiliation (BC/Prairie. these organizations provided market-level data on freight costs. or “rack to retail” sector. retail outlet and brand representation. retail pump prices . confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Petro-Canada. Five companies responded to this request: Imperial Oil. Shell Canada. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. the gross marketing margin must be examined in isolation from those other variables. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. Suncor Inc. and Canadian Tire Petroleum.. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. Ontario. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations.000. Process Overview As illustrated in part A. In all. it was essential to obtain data not normally available through existing public sources. In addition. To examine the competitiveness of the marketing. the gross marketing 1 Although White Rock is clearly not a major centre by itself.are influenced not by one. and for smaller markets. but a number of variables. MJ ERVIN & ASSOCIATES 39 . Furthermore. price history data not available through public sources.0001.

Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. in addition to operating cost and ancillary revenue data gathered in the study1. Where differences in gross product margin might still exist. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. to derive the 1995 average gross product margin for each of the study markets. 2 Accordingly. by product grade. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). From participant company supplied data. a broad representation of markets was possible. Finally. rack price. 3. 1995 average values were determined for pump price. 2.margin is stripped of its freight component. For each market. MJ ERVIN & ASSOCIATES 40 . as the “blended” price includes other product grades. and freight. The variables of tax content. weighted by sales demand. including some smaller centres. Using the derived gross product margins and volumes for each market. a market-by-market profile of outlet income is presented. and freight were successively removed from the pump price. average pump prices are higher than actual average regular gasoline prices. Where applicable. This allows for an accurate determination of net outlet revenue. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. rack price. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Group B (smaller market) and 19-market study averages. and the final “rationalized” gross product margin was determined for each market. these were weighted by volume. The gross product margin thus serves as an interim basis for comparing study markets. 1 Although outlet cost and ancillary revenue data was not available for all markets. to arrive at “blended” values2. average outlet annual throughput was determined for each market. tax content.

This value was then applied to the gross product margin to determine average outlet petroleum revenue. Unlike retail pump prices however. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors.7 million. a recognized source of data on world crude oil and petroleum markets and prices. When these margins are applied to outlet throughputs as in step 4 above. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. and therefore where assumptions were made. 7.to determine average consolidated net revenue per outlet. grade differentials were based on known differentials of nearby markets. Also. Wholesale refined product prices used in this study are therefore likely to be overstated. and gross product margins are therefore likely to be understated. freight. MJ ERVIN & ASSOCIATES 41 . many wholesale petroleum purchases are made at less than the “posted” rack price.. . and from one brand to another. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. and accordingly represent a broad spectrum of consumers and marketers. encompassing a significant portion of the entire Canadian market. average revenues from ancillary services were added. product margins. also considering that RUL constitutes the majority of product. In referring to marketing margins. From participant company data. it is important to understand that the use of rack price in this analysis has certain implications.4. petroleum revenues. accurate comparisons are possible. Interpretation of Data In some smaller centres. Supplier Overhead costs. The derived weighted average values of pump price. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. the effect on the “blended price” is small. While clear. Bloomberg rack price values were used as the assumed wholesale price.. including relatively smaller ones such as Sioux Lookout or Gaspé. marketing margin. as described on page 10. 6.. or consolidated net incomes. these 19 markets represent a combined population base of 8. represent a broad range of markets. etc. but they are relatively minor. so that on a cents-per-litre basis. and outlet operating costs were deducted from total revenue. perhaps by 1 to 2 cents per litre. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. A dollar-per-outlet estimate of these elements was made. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. and supplier profit. These differentials do vary from one market to another.. 5. objective data exist for both of these values.. This variation is constant across all nineteen markets however.

The data also shows that typically. accurate. The first of these variables to be examined is tax. The data shows a statistical pump price variance of over 17 cents per litre within this study group. higher priced markets are associated with smaller population centres. MJ ERVIN & ASSOCIATES 42 .38 cents per litre in ex-tax pump price. broken into tax and extax components.8 cent difference in pump price 1 See footnote at Appendix II. and based on objective. Tax Figure 19 shows posted pump prices for the study markets. table J for an explanation of how variance is derived.Rack prices used in this study are nevertheless market-driven. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.64 cents per litre in pump price. The 19-market study group exhibited a statistical variance1 of 17. The study data suggests that variations in tax rates account for a significant part of pump price differences. while lower prices tended to prevail in major centres. independently gathered data. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. A 6. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. but a variance of only 12. there is little to suggest why such a high variance exists. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices.

taxes were a significant element of pump price. thus providing a better basis for comparison.while all markets are subject to the same rate of federal excise tax and GST1. In all study markets. when examined on an ex-tax basis. The data shows that taxation between markets within the same province varies little. provincial tax rates can vary greatly. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. MJ ERVIN & ASSOCIATES 43 . Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. GST content can vary by market. This eliminates any effect that tax variability may have. was less than three cents.less than one-half cent per litre. namely the upstream industry and refiner sector. while taxation between provinces is more pronounced . but the variance is minimal .75 cents per litre (Vancouver. it is therefore more useful to use ex-tax pump prices when comparing any two markets. Figure 19: Pump Price . accounting for roughly half of the average retail price.between Calgary and Vancouver for example. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. additional elements of the revenue stream must be further isolated. Montreal).tax. 1 Due to pump price differences. as described in part A. or when examining historical price trends.

It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. reflecting some differences in refinery crude acquisition costs. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. and therefore are best analyzed separately. if a clear understanding is to be achieved.assuming transport costs did not outweigh the price difference. MJ ERVIN & ASSOCIATES Cents per litre 44 . reflecting the reality that at the rack level of competition. Furthermore. rack and pump prices.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. rack price) and gross marketing margin elements. but ultimately. the rack price is equivalent to the upstream margin plus the refiner’s margin. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. To address this. When rack price is deducted from the ex-tax pump price. This is due to the fact that for any market. one region cannot maintain rack prices at a higher level than another. the validity of analyzing gross marketing margins in isolation might be raised. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. differ little from those of major centres. as this would cause rack buyers to bring product in from the lower-priced region . Freight costs are additional. it should be restated that each of these sectors. as is examined below. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. in the case of Thompson). and their respective margins. the rack price is set at the rack point (Winnipeg. are clearly delineated by market-driven crude.

generally smaller markets.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. For other. with their component freight costs. the data shows that freight is often a significant part of the gross marketing margin. Before using this as an analytical tool however. this freight cost is almost negligible. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.3 cents per litre.0 cents per litre. as low as 0. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. For markets which are also established as rack points. remote population centres.49 cents per litre (gross product margin). Two of the study markets had freight costs in excess of 3. Although freight operations are often an integral part of many petroleum marketing operations. resulting in comparative gross product margins. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. it is therefore important to eliminate the freight variable from the gross marketing margin. Figure 21 shows a study market comparison of gross marketing margins. particularly in comparisons of major urban markets to small. and therefore a significant pump price factor. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. To provide a comparative view of the marketing dynamics within the study group. one final outside variable must be isolated: that of product freight. in fact. MJ ERVIN & ASSOCIATES 45 .16 cents per litre (gross marketing margin) to 7. it is essentially a “non-core” business.

a variance of only 2. petroleum revenues.68 cents per litre1. A 7. to the resultant retail gross product margin .95 cents per litre. while Group B markets averaged 7. Group A (larger population) markets averaged 5. was the highest of the study group.5 cent variance in gross product margin is still significant however.the gross revenue available to the petroleum marketing sector for its operations. or between any two regions.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.5 cents per litre average Gross Product Margin cited in Part B. Gaspé. or consolidated net incomes. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.6. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.06 cents per litre.42 cents per litre. while Toronto. Bloomberg rack price values were used as the assumed wholesale price. MJ ERVIN & ASSOCIATES 46 . 1995 gross product margin averaged 5. at 14.68 cents per litre. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.6 cents) to the variance in their component gross product margins (7. For all study markets. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.5 cent per litre average relates to regular gasoline in major markets.22 cents per litre Smaller markets showed a wider variance in gross product margin .5 cents).17 cents per litre. as the 3. at 3. The study revealed that: • • Retail gross product margins differ very little between major urban markets . product margins. was the lowest. In referring to marketing margins.

000.14.000 4.000 litres per year (Sioux Lookout) to over 5. for example. if any retail gasoline outlet located in the Toronto area for example. Indeed. 3. If these two factors are related to each other as they are in Figure 24.000. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .differences between markets.000 litres per year (Toronto).000. ranging from under 700.000. sold significantly less than 5 million litres of petroleum per year. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000.000 1.000.000 5. Figure 23: Average Annual Throughput per Outlet 6. vs.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. it would likely be so unprofitable as to be un-viable.2 cents per litre in Gaspé. an examination of related outlet throughput volumes is necessary.000 Litres 3. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. A wide range of volume performance is evident.1 cents per litre in Toronto. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. a wide range of variability still exists between markets in the study group .000 2.000. once isolating retail gross product margin from all of the “outside” pump price factors.

000 2.000 6. Ontario.000 Volume (litres) 4.000. while those with high Gross Product Margins tend to have low outlet throughputs.that is. With few exceptions. Although MJ ERVIN & ASSOCIATES 48 . Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. they remain essentially the same regardless of volume changes .7 million respectively. compared to 2.000.Figure 24: Outlet Volume vs.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 3.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.42 cents) than smaller (Group B) population centres (7. As most outlet operating cost are fixed in nature . It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. it follows that higher gross product margins will be the consequence. Regionally.000.6624 1. Smaller markets perform as competitively as larger centres. not of poor competition.962 R2 = 0. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. the Group A market outlets had roughly 50% more throughput than Group B outlets . If all outlets in a given market experience generally low throughputs.6634Ln(x) + 76. On average however. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. all market groups (BC/Prairie.000.000.95 cents).000 5. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.4 million litres annually. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.

which. however. averaged $69. outlet-based view of retail markets. in addition to petroleum sales. which for the study group. competitiveness occurs between retail outlets.000 2.000.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. Gross product margin.000 4.000. and incur many expenses in the course of their commerce.000. In reality.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. supplier overhead costs.000. Figure 26 summarizes total outlet petroleum sales. product cost. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). Ancillary revenues are those derived from non-petroleum sales sources.000. Figure 25: Outlet / Volume Relationship . It represents the residual revenue which is available to the dealer and to the supplier.the revenue available for dealer income. and ultimately shows that very little difference in competitiveness exists between any two markets. two additional factors are introduced: ancillary revenue and outlet operating costs. These additional factors clearly have an effect on the relative competitiveness of retail markets. while operating costs are those costs which are directly incurred in the operation of the retail facility.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.000. such as convenience stores. is only a measure of petroleum revenue per litre. as described below. this is likely due to the higher incidence of Group B study markets within this region. and must be examined. Consolidated Net Revenue per Outlet To create a complete.000 3. and the resultant consolidated net revenue. car wash. and auto service.000 6. supplement their incomes with other revenues.716 .000 5. less outlet costs. and supplier MJ ERVIN & ASSOCIATES 49 . ancillary sales.

In effect. A discussion of the ultimate distribution of this revenue is useful.000 $50. these ancillary operations contributed to a lower product margin and consequently.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Figure 26: Outlet Revenues.$154. Income BC/PR $300.000 per year respectively .000) $(200. causing the weighted average for Quebec / Atlantic to be depressed). Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. as explained below. reduced pump prices. As described above. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000 $250.000) $(300. $60. Most markets showed relatively similar net revenues (see Appendix II.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 vs. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(250. and his personal labour investment.000 $200. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000) $(150.000 $150. An examination of these component elements reveals a significant finding: that for most markets. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000) $(100. Costs. MJ ERVIN & ASSOCIATES 50 . which reflects his investment in the outlet. Finding 19: Based on published rack prices. Table K).000) $(350.profits.000 $100.Group B outlets were not as profitable as these revenue values might suggest.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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a 60. this market has access to numerous refiners along the Pacific coast through marine supply. The somewhat high margin placed this market slightly above. as described below. contributing to a higher than average pump price.ex tax Canada Average . net outlet revenues were less than those of other major centres. while average throughput ranked 4th. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Figure 28: Vancouver . Vancouver provides several perspectives into retail marketing.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.542. This may explain the somewhat elevated gross product margin in this market.000 barrel per day plant located in the greater Vancouver area.98 ¢ 0.Vancouver population # of brands # of outlets outlets per 10. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Vancouver collects a 4 cent per litre municipal tax.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price .968 litres 7. and also has local refining capacity. Low consolidated net revenues may have contributed to the higher margin. Geographic / Supply / Freight cost considerations: As a port city. Vancouver is also a terminal for a refined products pipeline from Edmonton. and with access to wholesale product by several means.658.745 18 446 2. ranking 11th. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.000 1. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. but well within a cluster of markets with similar throughputs. Overall.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Influence of other markets: Although relatively close to the US border.38 ¢ 7.

000 16.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. This market is close to its usual rack point.315 4 8 4. Despite its relatively small size. White Rock is essentially part of a major market due to its proximity to Vancouver. adjacent to the United States border. This suggests that. or competitive dynamics. the White Rock retail gasoline market displayed the same attributes as a major urban market. due to its proximity to one. MJ ERVIN & ASSOCIATES 55 . Vancouver. gasoline “cross-border shopping” is less pronounced than might be expected. Freight costs were accordingly low compared to other small markets in this study. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.98 ¢ 0. Like Vancouver.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC.630 litres 7. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. This is likely due to the fact that unlike many smaller markets. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Influence of other markets: Although this market is a border-crossing community. thus providing some unique characteristics for the market study. but less than most markets with a small population base. the study data found little to suggest a material effect upon representation. Price history / Taxation: Although no specific data is available. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. this market is subject to a 4 cent per litre municipal tax. White Rock’s margin was typical of markets with similar outlet throughputs. Geographic / Supply / Freight cost considerations:.604. at least in this market. Average outlet throughputs were relatively high.White Rock population # of brands # of outlets outlets per 10. and retail gross product margin was less than that of markets with a similar population base. In all respects. prices in this market have historically mirrored those of Vancouver. prices.45 ¢ 7.

Calgary had the third highest number of retail brands. Other considerations: Of the markets studied. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Product is usually sourced from Edmonton refineries via pipeline. Consolidated net revenue: was typical of other major markets in the study group.47 ¢ 0.24 ¢ 6.ex tax Canada Average .719 litres 6. Price history / Taxation: As the figure below shows. Some smaller markets in the vicinity have occasionally priced below Calgary. indicative of a strong competitive climate. pump prices in this market have historically been well below the Canadian 10-city average. Calgary is of sufficient size to support a viable rack market. Figure 29: Calgary .Calgary population # of brands # of outlets outlets per 10. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.827.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. creating some competitive pressures (see Nanton).000 710. Indeed. Influence of other markets: Calgary is fairly remote from US and other major markets. Rack-to-outlet freight costs are among the lowest in the study group. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. which was one reason for selecting Calgary as a study market.675 27 313 4. Calgary pump prices are very close to the Canadian average.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .

and this market is now more typical of other large population centres. This is partly due to provincial taxation levels. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. and is therefore a recognized rack pricing point.089.Regina population # of brands # of outlets outlets per 10.21 ¢ 7. Figure 30: Regina . and therefore experiences no particular influences from any other major market. which are among the highest in Canada. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.180 15 86 4.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market is removed from other significant markets.000 179. Influence of other markets: Like Calgary.50 ¢ 0. Since then. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .794 litres 7. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. margins and throughputs were typical of other markets with a similar population base. and a history of volatile pump prices.ex tax Canada Average . Although no supporting data is available. Ex-tax prices are also above average. price volatility has eased. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Regina was of some interest as a study market. Consolidated net revenue: was typical of other similar markets. Since 1993. supply/demand is likely more balanced. it is likely that this reflected a surplus of wholesale inventory within the local market or region.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 .

This may reflect a lower than average Consolidated Net Income.Winnipeg population # of brands # of outlets outlets per 10. Consolidated net revenue: No ancillary or outlet cost data was available for this market. this market is removed from other significant markets. like most markets of this population density. though somewhat higher than average ex-tax pump prices.ex tax Canada Average . and therefore experiences no particular influences from any other major market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.22 ¢ 7. Price history / Taxation: In the early 1990’s this market experienced some price war activity. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable.790 17 261 4. On an ex-tax basis. Figure 31: Winnipeg . prices have tended to stay somewhat above the Canadian average.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . possibly due to modest ancillary revenue. Influence of other markets: Like Calgary. probably related to a regional surplus of wholesale inventory (see Regina).06 ¢ 0. although. it is an established rack price point. although there is no study data to support this.217 litres 8.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 616. and has remained very close to the Canadian 10-city average. this market has exhibited relatively stable pricing.265. Since then.

41 ¢ 5. While these conditions would normally result in a high gross product margin. in order to maintain a share of the considerable potential sales revenue that passes through this market.91 ¢ 0. although not as low as expected.000 litres 5.071.600. Alberta population # of brands # of outlets outlets per 10. and perhaps healthy ancillary sales associated with highway traffic. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. as Figure 24 shows. Consolidated net revenue: No Ancillary or cost data was available. placing Nanton well below the expected margin.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.the highest of the entire group . more isolated small-town markets.and a low average outlet throughput. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . in terms of expected petroleum revenues. Despite its small size. Due to its highway location and its proximity to Calgary. Influence of other markets:. situated on a major North-South highway to the United States Among the study group. while others experience consistently high prices. Unlike many of the smaller markets in this study group. the Nanton retail gasoline market displayed the same price attributes as a major urban market.000 1. this market has a relatively low freight overhead. Nanton was perhaps the least viable market in the study group.585 4 5 31.Nanton. would have an offsetting effect. due to its proximity to one. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Nanton has traditionally priced either at or below Calgary. Nanton was the smallest market in terms of population. Average outlet throughputs were relatively low. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Nanton appeared to benchmark its pump prices to those of Calgary.far in excess of what would be expected of a community with a population of 1. a feature not available to other. MJ ERVIN & ASSOCIATES 59 . the retail gasoline market in Nanton was not restricted to the local population. In this respect. Nanton had the second lowest gross product margin of the study group.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. it is likely that low operating costs. Nanton had a high number of per capita outlets . Price history / Taxation: In order to attract market share beyond simply the local population.

though fairly typical of many smaller. further adding to overall high pump prices. this market has little or no influence upon. isolated markets.000 6. its normal rack point. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. they were comparable to other markets with similar average throughputs. Alberta population # of brands # of outlets outlets per 10.6 cents per litre. In contrast to Nanton. Supply is via tanker truck from Edmonton.6 ¢ 10. high pump prices. Price history / Taxation: Peace River is typical of small. MJ ERVIN & ASSOCIATES 60 .157.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.45 ¢ 1.Peace River. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. experiencing relatively high gross product margin and consequently.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets. other markets. and in fact fell into a tight cluster of four other study markets. nor is it influenced by. and due to its isolated locale in northern Alberta. Peace River has among the highest freight cost in the study group. Peace River also experiences high freight costs. Geographic / Supply / Freight cost considerations: At 1. and was accordingly chosen as a study market.623 litres 12.715 6 8 11.

01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. experiencing relatively high gross product margin and consequently. the community of Thompson clearly falls into the category of a small. nor is it influenced by.014. Geographic / Supply / Freight cost considerations: At 3. Price history / Taxation: Thompson was typical of small. Although outlets in Thompson appear to be as competitive as those of any other study market. Although ancillary revenues were the smallest of the study group. they were comparable to other markets with similar average throughputs. It also experienced high freight costs. a significant portion of which would likely be distributed towards supplier overhead costs.Thompson. outlet costs were also modest typical of most smaller markets. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Manitoba population # of brands # of outlets outlets per 10. further adding to overall high pump prices. and due to its isolated locale in northern Manitoba. isolated markets. thereby creating the potential for narrower margins. This however. Other considerations: Like other small markets. Influence of other markets: Since is not located on a major inter-uban thoroughfare. its usual rack point. Thompson is faced with the dilemma. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance.02 ¢ 11. Thompson is among the highest freight costs in the study group.1 ¢ 3. Supply is via tanker truck from Winnipeg. Consolidated net revenue: Low outlet throughputs were offset by higher margins.02 cents per litre. high pump prices. other markets. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.520 litres 14.000 14.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. and in fact fell into a tight cluster of four other study markets. resulting in per-outlet petroleum revenues which were quite typical of many markets. These factors resulted in relatively strong per-outlet net revenues. remote market. this market has little or no influence upon. MJ ERVIN & ASSOCIATES 61 . and reduced pump prices.975 5 6 4.

06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. similar to that of Montreal.775 30 546 2. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.000 2. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable.36 ¢ 0.Toronto population # of brands # of outlets outlets per 10. On an ex-tax basis however. Consolidated net revenue: Although no study data was available for this market. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. as evidenced by an exceptionally low gross product margin. Figure 32: Toronto . Margin/Throughput relationship (Figure 24): This market stood apart from the study group. least number of outlets per capita.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. It consequently has a low freight component. stretching from Pickering to Buffalo.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . In addition.3 ¢ 3. thus there exists a climate of robust competition. Within this region are thousands of retail outlets. this market ranked first in a number of measures: lowest gross product margin. and is also relatively close to wholesale supply sources in the US. this market was consistently less than the 10-city average. This is likely offset by high operating costs.478 litres 3. and a resultant low consolidated net revenue.extax Toronto Posted Price .06 cents per litre.275. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. it is likely that outlet ancillary revenues are among the highest in the country. and first in average throughput per outlet. With an average “blended” gross product margin of only 3.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . it had the second highest brand variety of the study group.098. New York. Influence of other markets: This market is continuously linked with several other major retail markets.

exhibiting all of the characteristics of robust competition.ex tax Canada Average . ancillary revenue was slightly lower than average. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. and close to the Canadian 10-city average.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.000 678. Other considerations: While pump prices in this market were somewhat higher than in Toronto. several smaller.145 19 209 3. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Consolidated net revenue: was low. in fact. Figure 33: Ottawa . and operating costs were higher than most.29 ¢ 5. rural markets co-exist in this area. Although petroleum revenues were typical of major markets. freight costs within this market were quite low.004. slightly lower that expected.Ottawa population # of brands # of outlets outlets per 10.948 litres 5.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.97 ¢ 0.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Influence of other markets: Although Ottawa is the only major market in the immediate area. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. some of which have on occasion priced below Ottawa (see Nanton and Calgary).

95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. somewhat isolated. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Sault Ste Marie is a sizable market.22 ¢ 7. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.550 litres 8. a consequence of the transport distance from the rack point. and between 5 to 8 cent per litre in gross product margin. MJ ERVIN & ASSOCIATES 64 . partly due to higher freight costs.Sault Ste Marie population # of brands # of outlets outlets per 10. Freight costs are therefore high. Pump prices in this market were thus typical of any market with similar throughput characteristics.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. Influence of other markets: This market is close to a US border market. average throughputs were modest. This would suggest that a significant market share is being lost across the US border.000 81.475 10 24 2. yet with some potential for cross-border retail competition. this Canadian market has some difficulty in remaining both competitive and viable. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. a product of relatively strong net petroleum revenues combined with lower than average operating costs. and accordingly. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.73 ¢ 1.465.

with little or no influence from other retail gasoline markets. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. Influence of other markets: This is clearly an isolated market. although high.006 litres in 1995.Sioux Lookout population # of brands # of outlets outlets per 10. this market experiences a high degree of price competition. Sioux Lookout is well-removed from any major highway. was much less than expected for a market of this size. brands.000 3.2 ¢ 11. and outlet throughputs of any market studied. largely due to higher freight costs. An average outlet in Sioux Lookout pumped only 694. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. This is a major factor in the high cost of gasoline in this market. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. Consolidated net revenue: No data was available for this market. Freight costs are therefore high.310 3 3 9.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. and had the least number of outlets.066 litres 14. This would suggest that. so that virtually all sales volume represents local demand only. It therefore presents some unique characteristics for the market study.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. despite its high prices. one-seventh the average throughput in Toronto.96 ¢ 3. MJ ERVIN & ASSOCIATES 65 . in fact the second highest in the study group.

This.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . pump prices in this market have a tendency to be volatile. this market ranks first of the study group in terms of brand variety. thus promoting a competitive climate.43 ¢ 0. this market interacts with several other markets in the region. a function of a competitive rack market and an excess of retail outlets competing for market share. and is also relatively close to wholesale supply sources in the US.000 1.144 litres 5.775. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. Influence of other markets: Like Toronto.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . Montreal was included in the selected market study.870 32 866 4.3 ¢ 5. On an ex-tax basis however.Montreal population # of brands # of outlets outlets per 10. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average.5 cents per litre was introduced into the Montreal area). Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.extax Montreal Posted Price . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.394. With 32 competing brands. combined with low petroleum revenues and high operating costs. with resultant low average outlet throughputs. placed Montreal lowest of all study markets in terms of consolidated net revenue. pump prices in Montreal have generally been at or below the 10-city average for major markets. Figure 34: Montreal . an additional tax of 1.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Price history / Taxation: As the figure shows. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. It therefore represents a highly competitive rack market.

Nevertheless. Chicoutimi is normally supplied from the Quebec city rack.289 litres 12.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. were quite typical of markets with similar populations.250. but is quite isolated from any other markets. Consolidated net revenue: was average among the study group. Gross product margin was accordingly high.Chicoutimi population # of brands # of outlets outlets per 10. this amounted to a reduction of 5. both pump and ex-tax prices in this market were higher than average.000 120. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. for example). Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. by tank truck. In the case of Chicoutimi. MJ ERVIN & ASSOCIATES 67 .08 ¢ 11. Margin/Throughput relationship (Figure 24): Outlet throughputs.28 ¢ 1. a partial factor in the high cost of gasoline in this market. although low.605 14 97 8.75 cents per litre. but as the figure shows. Freight costs are therefore somewhat high. this market has little potential as a rack market. yet is geographically quite isolated. within a cluster of other markets with similar attributes.

with little or no influence from other retail gasoline markets. located at a considerable distance from its rack source of supply. Gaspé is well-removed from any major highway. this margin was only slightly higher than expected for a market with these throughput attributes.900 litres 17. in the case. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981.Gaspé population # of brands # of outlets outlets per 10.50 ¢ 3.000 16. in fact the highest in the study group.17 gross product margin the highest of the study group. Nevertheless. a key factor contributing to its 14. by tank truck. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Although operating costs are likely to be low in a small market like Gaspé. Influence of other markets: This is clearly an isolated market. amounting to a reduction of 5. This is a major factor in the high cost of gasoline in this market. a product of high freight costs and gross product margins. Nevertheless. Freight costs are therefore high.33 ¢ 14.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.400 6 13 4. so that virtually all sales volume represents local demand only. both pump and extax prices in this market were higher than average.75 cents per litre. ancillary revenues would likely be modest. MJ ERVIN & ASSOCIATES 68 . Consolidated net revenue: No data was available for this market.

it is an established rack point.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Price history / Taxation: Historically. this market fell within the expected range of gross product margins as a function of outlet throughput. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. retail pump prices are ultimately a reflection of rack prices. resulting in lower than expected average outlet throughputs. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. which for Saint John. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.000 74. reflected in the high ex-tax pump price.extax MJ ERVIN & ASSOCIATES 69 .095.27 ¢ 9. Figure 35: Saint John NB . That a major refinery resides in this market might suggest that these prices should be among the least in the country.970 9 56 7. Saint John presents some unique characteristics for the market study. Nevertheless.ex tax Canada Average . posted pump prices in the Saint John market have closely followed the 10-city average. and is capable of shipping and receiving wholesale product through marine facilities.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . the Saint John retail market is relatively isolated from other retail markets of any significance. with or without a local refinery. Consolidated net revenue: was average for the study group.79 ¢ 0. Accordingly. Since provincial taxes are among the lowest in the country.Saint John NB population # of brands # of outlets outlets per 10.694 litres 9. Average gross product margin was consequently high. In fact. ex-tax prices were relatively high. and therefore.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. do not differ markedly from any other rack point in the study group. freight costs in this market are low.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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..... 71 MJ ERVIN & ASSOCIATES 73 ............... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes....................................... a feature of most market-regulated commerce.. the profitability of the 481 outlets studied appears only marginal........ residuals for outlets not studied may be better................................... ....... ................. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels...... 33 Finding 13: From 1991 to 1996.......... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences..................................... which ensures a competitive product price for buyer and seller alike............................ 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences. In effect.. which in turn.... remote population centres. given the possibility of discounts from posted rack prices and potentially lower overhead costs............................. while those with high Gross Product Margins tend to have low outlet throughputs.................................... these ancillary operations contributed to a lower product margin and consequently. the residual represented a net loss to the supplier....................... .. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations......................... particularly in comparisons of major urban markets to small............. and likely a negative impact on consumers.............. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre...............................51 Finding 21: Based on published rack prices and the individual outlet data.......... 50 Finding 20: For the 481 individual outlets studied... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness..................................................................... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre................................ reduced pump prices..................... ... ... 48 Finding 19: Based on published rack prices........ The viability of the Canadian retail gasoline sector as a whole may be somewhat better............... ................... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads........... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied..Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.... when compared on an ex-tax basis... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements....... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs...................................... are principally a reflection of changes in the underlying price of crude oil. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.........................

in comparing Canada average (city) pump prices to those of the United States. This has not simply been a result of a decline in underlying raw materials costs. On a national level. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 .Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. each with unique dynamics. price is but one of four competitiveness “tools” available to marketers (product. the very margins within which this industry operates has. 1. was shown to be strongly competitive: • A long-term decline in pump prices. The Canadian retail petroleum products industry. exhibited a diminishing trend (Finding 13). Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. Virtually all of the competitiveness indicators examined in this study relate to price. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). Although an objective measure of competitiveness is elusive. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. In comparing several diverse markets. Rack and pump prices are determined in competitive marketplaces. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. is mistaken. when taxes were excluded (Finding 14). a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. 2. was observed (Finding 10). As described in this study however. and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. over the long term. by all objective measures available to this study. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. The resultant margins. The study presents such a model. when measured in constant and nominal dollars. Canadian prices have been at or below US prices in recent years. place.

and product margins accounted for 3. Petroleum product taxes are levied at the federal. well over half of all outlets in Canada operate as lessees or independents. While some markets. but even in such cases. and in some markets. taxation as an element of public policy is an area worthy of additional research. This implies that the competitive dynamics pertaining to these retail markets can.even negative values. particularly smaller ones. rack price and freight cost. provincial. refiner margins accounted for 5.3 cents or 9 percent (Finding 5). This would entail the tracking of not only pump price. 3. or even between Canadian markets with differing tax structures. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). it is important to understand that. and in some markets. municipal levels of government. an exercise that consumers are unlikely to engage in. and do. these markets have managed to sustain a certain level of viability and competitiveness. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. Taxation is a significant factor in the price of retail gasoline. MJ ERVIN & ASSOCIATES 75 . or 6 percent (Finding 6) of the 1996 average regular pump price. but given its magnitude. vary considerably from one population centre to another. and are a predominant cause of inter-regional pump price differences (Finding 16). while crude oil markets are considered global in scope and rack product markets are considered regional in scope. Due to the localized nature of competition in the retail gasoline marketing sector. are thus a reflection of the state of product supply. The latter two can vary considerably from one market to another. presents a competitive disadvantage to Canadian marketers. experienced higher than average pump prices. The demonstrated exception to this is in markets directly adjacent to nearby US markets. demand and other competitive factors existing at the time. taxation differences between Canadian and US markets. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).5 cents. for example) were rationalized. Dealers were shown to have a variety of relationships with their supplier. generally do not serve as competitiveness inhibitors. measured against the average outlet throughput for that market. but also rack prices and outlet performance. retail petroleum markets are considered local (municipal) in scope. when the “outside” factors (tax. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. since this is the effective range of consumer choice. In applying such a model to the retail petroleum marketing industry. crude costs accounted for roughly 34 percent (Finding 2). By contrast. and accordingly. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study.

While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Retail gasoline marketing revenues. This margin represents gross revenue (after wholesale product and freight cost) which. reflecting consumer demand behavior (Finding 15). the Canadian retail marketing sector realized an average gross margin of 3. and more price-stable markets such as Sioux Lookout. exhibited competitive traits typical of any of the study markets. when distributed these three ways (Finding 20). on a per litre basis. The pump price/margin model shows that in 1996. second only to the United States. when examined on the margin-volume model. Viewed from this perspective. which in turn.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). the absence of price war activity does not imply a lack of competitiveness. supplier costs and profitability. which represent the majority of Canada’s population base. Retail pump price changes showed a close relationship to underlying rack prices. a price-stable market. Demand for gasoline was shown to vary significantly according to the time of year. constitute a small portion of the retail pump price. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. incorporated with ancillary revenues and outlet costs. In fact. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). 5.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. MJ ERVIN & ASSOCIATES 76 . Retail pump prices showed a corresponding seasonal pattern. is available to provide for all retail marketing operations including outlet costs. on the basis of price fluctuation alone. 4. dealer income. and a loss in the case of urban markets. Sioux Lookout. This consolidated outlet revenue. Rack prices were shown to not significantly differ between major centres. which in turn is the principal driver of ex-tax pump prices. Pump price fluctuations can be an indicator of competition in the marketplace. fluctuating prices are a strong competitiveness indicator (Finding 7). While price wars are undoubtedly an indicator of competitiveness. in a highly distinct. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. predictable seasonal pattern. showed a close relationship to underlying crude prices (Finding 11). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace.

Since 1991. most outlets used in the 19-market study represent major integrated oil companies. Both the downward trend in margins. Thus. 7. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. have caused. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). not excessive profits. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. despite increases in tax content and crude costs (Finding 12). intense competitive pressures in the downstream industry in general. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. both of which are beyond the direct influence of Canada’s oil companies. While these economics might appear to place this industry in a position of poor viability. assuming all other costs were unchanged. Thus. and has been a result of. based upon an assumed posted rack price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. not price. Nevertheless. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin.6. and the associated industry initiatives which are ongoing in nature. crude costs. including: • • • improving production efficiency through refinery plant rationalizations (closures). several competitive strategies. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Also. Industry profitability is extremely sensitive to very small changes in pump price. and the marketing sector in particular. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Declining refiner and marketing margins. MJ ERVIN & ASSOCIATES 77 . the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. despite the predisposition of many observers to use them as such. and have resulted from. Indeed. This trend has both resulted in. Also. in the long term these fluctuations are likely more reflective of market restorations. if Canadian average pump prices were only one cent higher than they were in 1995. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). and in turn. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. but to increases in underlying rack prices. these findings clearly show that pump price increases are ultimately linked not to increased profits. this industry sector would have realized profits of unprecedented proportions.

When these margins were compared to their corresponding outlet throughputs. had petroleum margins which were commensurate with average outlet throughput for that market. according to the margin-volume model. A wide range of petroleum gross product margins were evident within the 19market study group. there are three points to consider: • In very small markets. regardless of size. and this study showed that gasoline prices were no exception. reduce pump prices. The costs of most consumer goods in smaller. poor outlet throughputs were generally the predominant factor. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). virtually all of the 19 study markets exhibited similar levels of competition. although this study provides comprehensive evidence of this. which could actually inhibit competition. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. which should. This created some economic pressure to sell product at a higher pump price. other factors exist which contribute to relatively high margins and prices. most markets. • • At first glance. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. average pump prices were relatively high. In suggesting this approach however. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. it would seem that if local government in smaller markets were interested in lowering pump prices.8. 9. Although some smaller markets appeared to have higher gross product margins than larger markets. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Outlet throughput is a key determinant of inter-market pump price differences. thereby improving petroleum volumes and ancillary revenues at the remaining sites.5 million fewer litres of gasoline than a group A (major centre) station. MJ ERVIN & ASSOCIATES 78 . more isolated markets are generally higher than in larger centres. That such a relationship should exist was not surprising. While competitiveness in most smaller markets was shown to be as active as in larger centres. Thus. isolated markets face particular challenges: although found to be highly competitive. When plotted against the margin-volume model. the solution would be to encourage some dealers to exit the market. Smaller. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. reducing the number of outlets may also reduce the number of competitors. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).

Convenience store.• A full-serve retail gasoline outlet typically employs 3-5 staff. 10. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and likely others in Nova Scotia. Charlottetown. does not appear to benefit in consumer terms. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. as marketers find even more innovative ways to attract market share. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. in order to build upon the findings in this study towards a full understanding of the dynamics at work. has seen a decline in pump prices relative to other Canadian markets. This competition then. depressed petroleum revenues below that of outlet operating costs. Also. car wash. and in turn. The historical record is clear however: since deregulating pump prices. 11. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. many national and local environmental regulations exist for good cause. the degree of price competition in the retail petroleum has in effect. the Halifax market. As these findings show. under the current PEI regulatory structure. and the traditional automotive service bay. is well beyond the scope of this study. is both the cause and consequence of increased activity in ancillary operations. will likely preserve a highly competitive petroleum market. The loss of employment represented by a station closure may be of some concern to smaller communities. and as such. is viewed as an agency which exists to the benefit of industry and consumer alike. Retail ancillary operations are a critical element of petroleum price competition. MJ ERVIN & ASSOCIATES 79 . were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. and the perceived effect on their markets. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. characterized by narrow product margins and relatively flat pump prices. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. The federal Competition Bureau for example. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. are an acceptable limitation on pure competition (Finding 8).

and the converse image held in much of the public domain. 2. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. and the nature of competitiveness influences. margins and competitiveness factors. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . that where a healthy competitive climate exists. A regular comprehensive competitiveness evaluation. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Public perception measurement. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. in a simple format designed for consumers and legislators. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. This should be in the form of a quarterly summary of price trends and related measurements.This study proposes rather. Develop cooperative industry research into marketing sector competitiveness issues. not inhibit. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. possibly to the detriment of the consumer. as it does in the Canadian petroleum marketing sector. Improve public understanding and awareness of competition in the petroleum marketing sector. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. petroleum marketing competitiveness. 1.

consumers. and regulators alike. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. • • • • * * * Better understanding of this industry. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. along the lines of the model used in this study. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. and in particular. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES 81 . and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor.

Appendices MJ ERVIN & ASSOCIATES 82 .

Canadian Petroleum Products Institute.I Glossary of Terms Ancillary service . which serves as the voice of the petroleum products industry in Canada on environment. GST. Ex-tax Pump Price . Marketer . provincial pump tax. car wash. MJ ERVIN & ASSOCIATES 83 . an association of petroleum refiners and marketers.the retail price of gasoline that would be displayed if all product taxes were removed. The ex-tax pump price is exclusive of these taxes. such as a major oil company or regional refiner/marketer. Usually expressed on a per-unit basis.a service provided in addition to the basic retail petroleum sales operation. independent dealers.a petroleum marketer who is not involved in the refining of petroleum products. and included in the retail pump price. for example.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. There are several modes (see below) of dealer operation. the regular unleaded pump price. Downstream . Grade Differential . health.(for the purpose of this study) the cost. Distribution Costs . lubricants. and therefore purchases its supply of petroleum product from an outside source.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. such as convenience goods.a generic term referring to a retail outlet operator.the difference in pump price between a premium or mid-grade of gasoline vs. and commission dealers. such as a retail gasoline outlet.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. but inclusive of any corporate taxes on earnings. Margin .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Major Oil Company . of transporting petroleum product from the rack point to the final point of sale.an organization who sells refined petroleum products to end-use consumers. safety and business issues. and in some regions. such as lessees. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Independent Petroleum Marketer . Lessee ..the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Integrated Oil Company . These product taxes include Excise tax. Dealer . etc.. CPPI . municipal tax levees. Excise Tax . generally expressed in cents per litre. etc. diesel. in cents per litre. service bays. currently established at 10¢ per litre.

the segment of the oil industry involved in the exploration and/or production of crude oil.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. commission dealer. manufactures (from crude oil) a range of petroleum products suitable for consumer use. Supplier . PCF . This may be at a refinery loading terminal. the raw material from which petroleum products are manufactured.Petroleum Communication Foundation. these can be broadly classified as company operated. Upstream . and independent dealer.the type of contractual relationship between the supplier and the dealer (outlet operator). MJ ERVIN & ASSOCIATES 84 . Transfer Price . Rack Price . Refiner . lessee. it is usually based on the market-driven rack price. usually per month or per year. Regional Refiner/Marketer . Rack Point .within the context of retail gasoline marketing. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products.the wholesale price posted at the rack point. In the retail gasoline sector. Throughput . the supplier has initial title to the petroleum product as it leaves the rack point. Although in theory the transfer price could be set at any arbitrary value.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.an organization who. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. an association of upstream and downstream oil companies and related organizations.Mode .the point at which title to refined product is transferred from the refiner to the supplier.

5 111.2 45. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.1 167.2 99.7 96.1 104.1 97.3 55.4 53.0 102. 62-010: Consumer Prices and Price Indexes.5 120.2 92.5 145.8 106.1 146.0 1988 108.3 52. No.2 20.0 30.2 49.8 135.4 120.3 134.0 115.3 119.4 34.5 94.9 155.3 96.1 151.8 130.2 127.8 28.5 30.0 135.3 40.8 93.7 132.1 1990 119.1 26.4 57. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.4 104.0 93.8 94.1 115.3 58.5 124.4 45.4 134.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 49.4 124.5 112.8 104.3 122.3 1989 114.7 122.1 120.1 104.8 108.3 160.3 132.9 97.4 104.1 126.4 152.4 29.2 142.1 48.0 19.2 109.7 123.7 29.8 47.8 132.6 51.3 151.9 1994 130.0 97.6 122.9 115.6 92.6 133.0 42.6 107.4 122.2 39.4 27.6 91.1 117.0 32.2 45.9 26.1 105. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.7 118.2 112.3 139.0 111.2 50.8 95.3 125. using a weighted (by provincial gasoline demand) 10 city average.7 22.7 30.1 87.2 30.1 40.9 1995 133.9 1993 130.2 121.8 1987 104.3 27.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.7 124. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.3 1992 128.4 136.1 103.9 26.2 31.1 120.5 100.5 115.4 110.5 25.0 104.6 136. MJ ERVIN & ASSOCIATES 85 .3 19. Nominal (¢/litre) (2) RUL Annual Price.5 126.3 141.7 54.0 93. Nominal (¢/litre) (2) RUL Ex-tax Price.7 95.9 118.1 144.3 115.1 117.9 108.9 122.0 1991 126.2 133.4 97.

0 28.7 31.4 14.5 54.9 22.0 54.4 30.6 18.1 5.6 28.8 9.7 14.3 24.9 4.4 31.0 26.1 16.5 27.2 65.8 55.4 58.1 19.1 7.3 13.4 32.Table B: Key Price / Margin History .7 Downstream Margin 14.7 63.6 52.9 23.6 54.7 39.9 13.0 25.9 26.3 Tax Content 23.1 13.3 4.9 25.9 11.7 7.9 6.5 8.2 23.4 56.8 8.1 23.2 26.5 7.5 23.3 9.9 12.5 14.4 22.3 5.2 23.7 32.8 33.1 53.9 23.4 13.0 24.7 29.7 15.9 7.7 4.7 4.7 33.3 6.3 58.1 9.1 18.2 13.0 8.8 14.9 9.7 19.9 55.1 23.8 11.4 15.5 10.7 58.2 27.6 13.2 14.9 25.9 30.9 14.3 26.4 34.0 16.5 28.4 55.5 Gross Marketing Margin Gross Refiner Margin 53.6 24.0 24.3 54.3 6.3 23.6 25.7 23.3 15.9 53.3 22.9 58.2 13.3 12.4 24.9 55.1 22.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.2 8.6 20.0 55.4 14.1 13.6 54.3 15.2 7.2 7.2 22.0 7.6 23.5 23.4 31.1 24.2 4.3 13.5 26.2 6.8 57.8 23.9 24.2 14.3 54.6 26.2 5.5 10.0 24.2 27.1 16.0 16.9 6.9 53.9 31.6 26.8 16.8 15.9 56.0 12.7 4.5 22.1 53.0 7.1 21.8 26.2 12.9 25.7 29.5 56.5 31.8 8.6 26.2 13.5 26.5 15.3 56.4 26.0 24.0 9.5 33.7 13.9 54.3 57.1 25.0 20.6 54.9 23.3 17.6 5.7 14.8 21.2 15.9 7.5 19.7 29.7 24.4 MJ ERVIN & ASSOCIATES 86 .4 9.5 11.1 29.3 25.4 21.5 25.3 56.0 24.7 12.6 8.8 21.2 11.6 23.0 16.7 6.5 57.6 25.4 12.3 66.1 16.2 24.7 14.2 41.2 7.4 53.0 52.4 24.8 14.0 24.8 29.7 14.2 26.5 35.7 25.8 53.8 13.0 22.5 23.1 18.1 39.8 30.3 54.8 25.1 23.2 21.7 14.5 32.0 26.7 18.7 18.2 25.2 63.1 17.7 34.4 26.9 4.2 16.9 17.2 25.3 42.4 7.1 7.0 24.0 33.5 5.0 13.8 23.3 14.9 26.9 25.0 26.4 14.8 28.3 13.2 16.6 6.0 4.0 16.0 10.4 26.7 7.8 53.8 24.4 29.9 25.8 55.5 6.4 57.8 22.1 22.6 21.9 21.8 26.6 7.4 20.5 27.3 13.6 4.0 5.5 7.5 16.0 7.7 7.2 6.2 13.9 7.6 13.2 27.1 13.0 14.5 30.4 33.9 14.4 8.2 56.7 28.4 14.0 15.9 15.8 14.9 6.6 9.4 13.3 22.9 56.5 14.7 19.3 26.3 13.7 8.8 14.9 8.1 52.2 7.2 29.0 25.1 16.

2 20.0 26.9 12.0 28.6 4.0 5.1 6.7 25.0 6.0 52.2 12.1 51.2 14.1 11.8 50.5 9.5 15.7 5.1 55.9 49.4 13.7 6.0 12.7 53.0 26.4 25.0 57.1 24.8 22.0 25.4 24.9 6.4 5.4 6.2 20.8 49.8 25.9 11.2 14.7 7.3 7.5 20.9 14.4 11.1 6.2 25.1 14.9 4.5 7.0 25.3 21.5 25.3 58.0 9.9 14.4 6.9 27.0 53.0 54.6 10.2 23.4 26.6 4.4 21.6 16.5 11.8 20.1 16.9 4.3 23.1 11.5 13.7 8.7 26.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 26.3 26.3 54.7 26.2 5.7 24.5 17.5 21.0 27.3 26.9 58.1 26.0 6.6 15.5 19.0 9.6 53.5 2.7 3.6 3.2 11.1 26.1 51.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .5 13.6 27.3 7.7 3.6 15.6 20.2 14.2 54.9 23.6 53.2 25.2 27.5 5.1 6.7 52.4 6.5 3.2 Gross Marketing Margin 4.1 57.7 13.0 14.4 6.5 5.3 26.3 9.6 9.8 4.9 29.3 4.6 5.1 6.3 13.1 14.7 5.1 11.3 6.7 29.6 23.7 15.0 14.9 27.0 5.5 21.6 17.7 14.2 15.3 26.7 25.3 28.9 19.7 7.7 24.2 7.3 4.7 51.4 32.9 29.1 10.1 54.2 28.8 17.1 26.8 23.1 14.3 9.8 28.2 26.9 5.5 55.7 14.1 61.9 17.8 52.7 12.2 7.2 7.7 13.3 8.4 16.3 26.4 28.6 12.4 51.8 28.7 18.1 Gross Refiner Margin 7.1 Tax Content 26.5 14.2 26.4 26.3 55.8 29.0 28.5 6.3 26.7 16.1 20.4 26.2 4.8 6.7 53.3 26.4 26.9 26.5 7.1 15.0 28.1 15.2 49.3 26.3 9.5 54.2 4.5 11.2 9.8 10.9 3.8 27.9 12.0 28.9 9.6 10.8 23.0 28.3 28.0 6.1 15.2 7.5 4.6 20.7 23.3 12.1 11.4 25.4 7.5 3.5 6.1 21.6 21.3 21.7 6.0 11.9 28.3 27.6 19.6 11.4 4.3 25.9 49.5 53.7 53.5 23.5 21.9 Downstream Margin 12.3 53.0 29.4 21.5 19.1 3.0 12.4 15.2 26.0 24.5 6.3 4.5 28.

654. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.6 28.437.0 24.089.767.4 24.070 3. Demand.179 3.287 2.558.141 3.389.4 31.479 2.025.837.973.822.900.056 3.097 2.884 2.366 2.2 23.254 2.338 3.182 3.377.801.152 2.630.455.101 2.325 2.9 23.831.619 2.429 2.613 3.047 2.672.782 3.5 22.960.2 22.326.0 20.873.609.409.967 2.085.633 2.430.7 28.625 2.6 26.833 2.628 3.477.813 2.804 3.744.315 2.300.979 2.141.666.677 3.897.114 3.5 27.191 2.9 23.682 3.970 3.765 3.297 2.142.9 31.045 2.8 21.4 32.301.9 30.141.7 18.779 2.935 3.572 2.8 26.045.933 3.818.299.051 3.475 2.687.313 2.684 2.281 2.1 23.2 26.671.047 3.283.7 21.3 23.5 31.029 2.469 4.647.642.2 27.345.250.771 3.532.331 2.298 2.565.8 27.030.521 2.876.840.626.703 2.544 3.4 22.095 2.000 3.970.904.281.369 2.2 23.669.808.7 29.516.102.748.7 31.894.176 3.035 2.893.346.580 3.587.8 30.181.661 Canada Avg ex tax RUL pump price (¢/l) 39.839 2.268 2.370 2.930.002.311 3.122.688.9 26.416 2.301.026 2.622.823.081.193 3.027 2.890.498.130 3.120.151.661 Canadian Domestic Gasoline Sales (M3) 2.019.887.287 2.457 2.830.859 2.301 2.044 2.3 22.979 3.729.1 21.295.131.462.324 2.938.499 2.2 27.752 2.880 Canadian Retail Gasoline Sales (M3) 2.733 2.5 27.168 2.9 21.636.113.627 2.140.8 23.501.735.7 34.011 2.176 2.564 2.621.294.199 2.7 24.188 3.193 3.720 3.437.2 20.112 2.022.874 3.161.443 2.773.456 2.439.3 22.7 29.476.710.130 3.796.725.254.716.667 2.871 2.798.2 24.9 23.411.615 2.160 3.853.810.299 2.4 21.785.636.9 22.291.480.651 2.5 30.245.7 29.6 24.970.473.381 2.886 3.7 26.995.427.335 2.3 24.2 26.3 23.8 33.1 29.322 2.518.3 Canada Avg RUL Rack Price (¢/l) 35.287.263.321.039.075.269 2.739.015 3.122 2.714.8 22.612 3.934.4 21.180.592 2.329 3.1 23.9 17.8 28.379.5 32.286.322 2.566.369.502 2.9 19.0 28.108.646 2.323 3.133 3.4 24.373.1 16.285 2.192.510 3.095.8 MJ ERVIN & ASSOCIATES 88 .235 3.316.8 29.827 3.930 3.003.600.202 3.6 21.748 2.262.620 3.2 27.255 3.070.378.270 3.279 2.853 3.869 2.132.415 2.1 23.361.2 21.218.968 3.6 23.599 2.083.4 29.209.429 2.641.037 2.673 2.7 24.2 27.218 3.246 2.490 3.509 3.1 22.865.5 19.422.Table C: Canadian Supply.841 2.067.966.5 25.101.254.682.853 2.709 2.403 2.843.558.8 23.799.644 3.801.637 3.693 3.932 2.604 2. Inventory.4 25.508.743 2.589 3.897 3.883.256 2.461 3.781.180 2.251.220.844.5 28.2 29.164.441.732.020 2.450 2.333.889 3.073 2.941 2.931 3.206.180 3.485 2.045 2.767.897 2.976.9 26.202.958.322 3.242 2.354.804 2.5 23.775.9 29.878 2.3 26.633.969 2.458.201.709 2.864 2.952.802 2.232 3.998.412 2.

1 21.4 26.5 25.8 21.717.415 2.9 29.864 2.165.317 2.936 3.906.785.386 3.773.370.068.714 2.997 2.130 3. demand.679.414 3.048.184.516 3.261.8 25.182.324 2.2 26.692.8 28.0 24.170 Canadian Retail Gasoline Sales (M3) 2.264 2.8 24.0 26.638 2.505 2.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.8 20.555.660 3.320 3.294 3.961.871 3.467 2.222 2.097.840 2.753 3.442 2.904.198.324.644 3.940 2.7 21.675 2.806.671.7 19.382. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .363.797.7 22.566 3.315.483.155 2.386 3.2 25.219 Canada Avg ex tax RUL pump price (¢/l) 27.6 20.179.889.537.999 3.928 3.649.825.149.977.791 3.480 2.656 3.0 25.195.2 25.620.170 3.669 2.984 3.658.055 2.986.593.617 2.606.539.344 3.390.4 26.077.703 3.5 21.601 3.4 20.521 2.005 2.796.123.607.376.264 2.5 source: Statistics Canada (production.970.965.799 2.198 2.9 22.214 2.1 24.649.597 2.830 3.0 25.469.006 3.6 20.074.244 3.857.614.9 27.5 21.7 Canada Avg RUL Rack Price (¢/l) 20.4 25.919 2.881.204.338 2.112 3.148.250.346 2.082.336.648 3.667 Canadian Domestic Gasoline Sales (M3) 3.205 2.141 2.863.930.519.994 3.426.037 3.198.0 26.

8 56.5 58.8 44.6 48.2 65.7 65.9 48.9 54.3 54.1 44.9 52.9 52.4 46.7 53.1 53.6 62.4 55.3 56.9 55.9 61.9 51.6 53.7 44.9 53.3 54.5 51.3 62.9 47.9 56.8 53.8 56.2 57.5 59.5 45.5 60.0 50.4 56.3 49.4 61.9 63.9 64.8 45.0 59.4 53.9 53.2 62.2 62.9 61.5 59.9 52.4 57.9 54.5 58.7 51.2 51.5 45.9 51.2 54.9 52.9 58.4 56.7 62.4 50.7 46.8 53.4 61.Table D: Pump Price History .5 Vancouver 53.1 50.2 43.2 46.4 63.3 51.8 47.8 52.9 58.0 61.1 49.9 56.5 50.5 56.5 58.7 51.8 47.5 57.5 55.2 54.1 53.5 57.4 46.8 57.5 57.5 51.9 47.3 61.6 54.8 53.7 51.2 46.9 61.1 49.3 52.8 51.9 56.7 63.5 53.7 50.8 48.6 56.6 54.5 60.6 55.5 47.5 62.2 50.4 52.5 53.0 39.4 46.3 59.8 57.9 64.4 55.1 59.1 49.9 59.5 56.4 52.5 60.2 Nanton Peace River Regina 49.7 57.6 47.9 62.5 57.9 58.5 61.3 50.6 58.5 60.8 64.9 61.5 59.2 62.5 56.9 49.4 53.2 48.3 49.7 50.4 65.5 58.5 47.9 53.9 51.5 51.8 41.6 51.1 60.5 51.8 56.4 47.9 57.5 57.8 52.2 54.4 52.5 59.6 58.8 56.2 58.1 55.7 52.9 56.6 59.0 62.4 58.9 54.2 51.9 54.4 56.6 47.6 52.9 52.0 48.7 54.2 50.9 46.0 61.4 54.7 65.6 46.9 59.9 57.5 57.9 53.8 48.0 61.8 54.5 54.2 65.4 57.5 60.9 MJ ERVIN & ASSOCIATES 90 .5 55.5 59.6 47.5 49.8 50.5 58.9 53.9 55.3 52.4 61.6 48.6 55.9 56.3 48.2 62.5 56.9 56.9 51.5 46.7 53.9 49.4 Winnipeg 49.5 61.5 59.9 49.5 58.0 61.3 52.8 49.3 42.0 58.5 58.1 56.4 56.8 56.5 58.9 53.0 46.2 50.5 58.4 49.9 54.0 62.3 52.8 50.9 52.8 52.5 47.6 53.9 61.5 57.2 51.9 53.8 59.7 48.9 54.7 53.5 59.5 57.4 48.2 46.2 59.9 44.0 Sioux Lookout 62.2 63.9 56.9 56.6 44.0 52.2 62.7 65.9 52.9 55.0 52.8 48.7 45.9 61.4 55.5 54.1 44.9 45.4 54.9 62.0 55.3 52.9 58.5 57.8 59.5 52.9 44.7 65.7 49.5 57.4 56.9 53.9 64.1 55.1 43.8 53.5 57.7 62.5 57.9 56.4 58.0 59.2 62.7 White Rock Calgary 45.4 55.9 47.9 58.7 45.4 53.5 58.6 48.6 49.0 61.1 55.4 55.8 55.1 52.6 46.5 53.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 56.8 Thompson 59.0 44.8 52.9 54.9 53.3 55.0 61.2 62.9 47.5 59.6 50.7 57.3 55.2 55.9 54.2 62.5 59.4 52.3 48.1 41.5 58.7 52.5 51.9 64.9 53.1 50.9 50.4 52.0 61.5 57.5 52.4 55.3 50.7 48.9 53.9 55.7 54.0 62.2 56.2 47.9 56.9 56.7 65.9 64.6 50.4 56.4 54.8 48.5 58.2 61.4 59.8 52.1 52.2 62.7 54.5 60.8 56.0 57.0 54.

8 61.1 56.4 55.5 48.3 54.6 51.0 55.8 53.7 53.0 51.9 63.7 57.2 57.8 57.5 57.7 48.0 55.9 56.2 56.9 52.4 51.8 54.8 50.5 60.5 57.3 49.7 51.1 52.7 57.2 61.6 53.4 57.9 55.3 59.0 56.7 56.3 61.9 49.5 61.1 58.5 52.4 53.9 49.3 55.8 63.7 58.4 54.1 61.1 52.1 54.7 51.4 53.2 57.7 57.0 48.5 54.9 53.3 60.1 54.7 52.7 60.2 54.9 61.8 52.9 53.4 58.2 Montreal 63.7 50.2 49.6 54.1 55.1 49.6 63.6 52.7 52.1 53.9 55.6 50.1 53.1 55.4 52.1 48.5 55.9 55.0 55.6 58.9 64.7 52.8 59.3 53.3 56.6 53.6 52.2 60.7 54.3 54.0 56.6 54.1 57.3 52.7 51.1 51.5 57.6 Canada Avg 55.5 64.8 49.8 56.6 58.5 54.0 55.9 57.0 55.2 56.2 56.2 59.6 54.9 61.9 54.9 55.6 56.4 55.3 58.6 54.8 49.7 56.0 47.0 52.9 49.1 56.7 57.2 51.2 56.4 54.5 52.4 53.8 56.5 61.2 Chicoutimi Gaspé Saint John 60.3 51.4 51.3 54.9 50.9 54.1 61.5 54.3 54.3 54.1 51.7 54.0 52.6 55.7 51.6 52.9 57.4 54.7 59.5 67.9 56.7 48.2 53.5 51.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.5 64.2 51.1 56.2 58.5 54.0 52.1 55.3 55.4 45.2 57.0 49.8 55.2 55.0 50.0 57.6 59.2 58.6 54.2 54.Table D: Pump Price History .6 55.1 55.0 54.1 53.1 59.1 54.7 64.1 54.2 49.8 53.1 Toronto 52.3 52.2 55.9 61.6 50.3 54.0 60.9 57.7 54.1 57.9 56.1 61.9 53.6 49.9 60.4 49.0 48.7 54.1 60.7 46.6 53.4 54.9 56.6 54.7 57.2 52.4 57.0 55.5 63.3 57.8 57.6 58.2 54.5 56.3 59.2 57.2 59.6 56.5 52.9 53.5 63.0 50.0 57.0 54.2 61.6 55.9 55.5 59.6 63.6 54.9 58.4 52.2 55.8 55.0 52.8 55.8 61.2 50.6 59.0 50.9 64.5 51.0 56.0 57.9 55.5 61.8 54.8 52.6 58.7 49.4 54.3 53.4 54.4 54.7 55.9 60.9 55.5 53.7 54.0 51.3 53.1 58.2 55.8 47.2 55.2 61.7 44.3 59.4 58.9 60.6 56.6 61.6 61.3 56.9 64.5 56.0 59.7 47.7 58.2 51.6 52.4 51.5 MJ ERVIN & ASSOCIATES 91 .1 59.2 52.1 51.6 63.8 55.5 56.5 59.5 53.0 53.8 60.0 53.6 56.6 51.6 55.9 54.2 57.4 58.4 58.0 60.1 58.3 56.0 54.4 57.4 53.8 50.5 56.5 57.2 49.4 50.9 49.3 56.8 53.6 55.1 54.3 59.9 55.6 49.2 60.5 55.6 52.8 55.2 54.1 55.5 52.3 54.9 62.3 62.4 54.0 54.9 57.3 53.8 57.6 50.2 55.3 52.3 55.8 54.3 54.8 55.8 Halifax Charlottetown 60.6 52.8 55.3 55.6 58.2 57.6 60.8 54.4 57.3 52.2 58.1 53.1 53.0 57.2 53.1 57.2 53.0 60.1 58.5 56.5 51.3 56.6 59.2 52.5 53.0 52.1 60.7 59.6 53.8 51.4 58.6 51.6 52.5 63.0 61.2 54.4 60.2 57.5 Ottawa 58.2 49.0 53.7 56.0 47.7 56.5 60.0 60.5 54.9 61.1 54.0 52.2 56.2 57.5 55.5 54.8 60.9 55.9 55.7 53.2 56.2 57.1 55.3 55.0 59.6 55.0 58.9 53.8 55.1 52.5 58.8 50.9 58.5 53.3 49.3 53.0 61.3 55.4 58.4 57.2 57.5 57.6 57.9 61.4 57.6 55.5 54.5 51.7 54.2 56.2 56.9 51.7 56.7 56.5 59.3 54.0 59.

3 29.4 27.5 27.8 23.6 26.8 24.1 24.7 30.1 25.3 24.3 26.7 Sep-95 30.8 28.5 Oct-95 30.4 28.2 Jun-94 31.9 26.7 29.0 22.5 28.7 Winnipeg extax 27.3 23.7 30.0 26.0 27.4 25.0 23.1 31.9 Aug-93 30.4 30.2 26.5 Sep-92 29.2 25.5 24.6 27.2 23.7 29.5 25.6 23.4 30.9 28.7 28.6 29.7 26.4 29.3 28.0 25.5 27.4 31.7 24.4 31.9 26.2 28.0 24.6 27.2 26.7 30.3 21.2 26.9 31.4 25.8 27.1 22.0 25.4 24.3 28.7 28.2 Nov-94 29.7 24.6 30.7 25.7 Mar-94 28.5 24.0 26.6 May-95 29.Table E: Ex-tax Pump Price History .4 27.8 25.1 23.7 26.4 31.8 27.4 28.1 30.8 31.3 26.9 26.4 31.6 28.9 30.8 27.5 26.5 27.6 26.4 Dec-92 31.3 29.3 26.4 23.5 21.3 28.9 30.6 23.0 24.0 23.9 27.9 27.6 Jun-92 32.3 32.9 25.7 28.1 Feb-93 29.3 27.4 22.7 27.4 23.9 28.0 May-92 28.0 29.4 31.0 Oct-93 28.4 24.6 Sep-93 28.6 26.2 29.3 23.0 23.3 29.4 28.1 25.2 24.1 28.8 Feb-94 24.1 Apr-95 30.4 29.3 26.6 22.3 33.0 26.3 Dec-95 Edmonton Regina extax extax 27.1 27.7 31.5 29.9 24.6 27.4 27.6 24.2 Nov-92 31.7 28.4 30.2 Apr-93 28.8 28.7 Jan-95 27.3 Feb-95 26.9 Oct-94 32.7 Aug-92 24.8 29.6 25.5 29.4 31.3 Jan-93 30.1 25.8 21.3 27.6 26.0 32.1 22.1 31.2 28.1 27.5 Nov-95 30.5 29.4 29.8 29.4 22.9 25.5 23.7 Jan-92 31.0 Jun-93 26.7 30.3 30.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.3 29.3 31.2 32.3 24.2 Nov-93 27.4 30.6 29.5 23.6 29.2 22.8 24.6 Mar-93 28.4 29.8 Jan-94 25.8 22.7 29.6 29.5 27.8 24.5 29.3 29.0 24.4 26.7 27.8 29.5 24.4 27.9 30.1 25.0 23.9 25.2 24.5 Feb-92 28.3 29.4 29.4 22.4 25.1 24.3 28.4 25.9 27.7 Sep-94 32.6 30.1 28.1 20.0 31.8 28.4 20.8 26.8 25.4 31.5 Jul-94 29.4 29.9 Jul-93 28.9 25.9 26.1 Apr-94 29.0 25.3 Jul-92 31.6 26.4 20.2 Dec-94 26.1 24.2 29.2 24.0 27.6 24.9 25.6 27.2 27.5 21.8 27.8 27.2 26.0 May-93 29.9 28.6 28.5 Oct-92 30.8 26.4 MJ ERVIN & ASSOCIATES 92 .0 28.0 Apr-92 30.9 24.6 22.7 26.8 27.6 30.5 26.9 21.9 24.6 23.9 28.3 30.4 29.7 28.9 23.3 28.9 20.6 25.2 25.4 27.8 29.7 26.6 26.9 23.6 26.2 27.1 26.1 Mar-95 29.9 29.1 26.8 25.7 29.5 Aug-94 28.4 21.8 24.7 28.4 23.2 28.1 19.3 29.3 30.3 29.0 21.4 Jun-95 30.4 25.3 May-94 28.9 27.4 Mar-92 28.9 21.0 23.3 30.8 26.4 20.6 23.6 21.9 29.1 30.2 28.3 24.6 Aug-95 30.9 24.8 26.2 24.5 Jul-95 30.7 30.9 29.5 27.3 26.8 Dec-93 26.8 Toronto extax 26.3 29.5 29.9 24.6 26.3 29.0 31.

9 28.7 26.6 32.9 28.7 29.8 23.3 28.1 26.1 24.4 26.5 33.5 28.3 33.2 26.8 25.3 28.8 27.9 26.1 28.2 26.6 34.8 33.2 26.2 22.7 28.6 36.6 28.3 26.9 27.4 25.1 31.4 32.5 24.2 22.9 26.1 34.1 30.5 25.9 31.2 33.3 29.5 28.3 35.6 29.5 32.8 25.8 26.2 25.2 32.7 24.0 28.2 36.6 27.3 29.1 24.4 31.8 32.3 28.5 29.6 31.6 32.5 25.0 28.0 30.3 29.6 28.2 29.7 28.0 23.Table E: Ex-tax Pump Price History .5 27.0 33.2 33.2 26.3 31.8 30.9 32.3 31.8 30.8 27.4 24.7 27.4 27.2 27.5 26.9 27.1 25.5 33.6 34.0 33.5 27.4 31.3 28.8 32.6 26.7 24.2 28.3 34.4 33.7 22.2 28.4 32.7 23.4 28.5 25.8 29.7 33.7 24.8 25.6 26.1 32.7 28.6 29.6 32.3 25.1 22.4 34.0 28.9 29.7 34.6 33.7 25.5 25.0 26.4 36.4 26.2 26.8 28.0 29.0 31.0 25.9 31.2 30.8 27.7 MJ ERVIN & ASSOCIATES 93 .0 28.1 32.8 23.0 25.6 27.6 32.9 23.0 32.9 37.3 34.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.8 28.7 27.1 26.4 36.8 28.8 27.1 29.6 26.5 31.9 27.3 31.6 27.3 31.7 26.0 26.7 34.0 34.7 28.9 30.4 33.7 32.2 27.7 26.6 25.4 22.8 26.7 26.1 29.0 34.9 27.3 25.9 27.1 32.0 34.5 36.6 24.1 34.3 27.6 28.6 28.6 26.5 33.0 26.8 23.9 29.1 Montreal extax 31.2 24.0 23.5 28.0 36.7 30.9 29.2 27.2 21.0 29.8 28.6 31.9 29.4 24.3 28.8 26.2 22.5 25.9 32.9 24.4 33.9 26.0 36.0 32.7 27.9 32.8 26.7 24.2 22.1 30.2 30.2 27.9 33.8 26.6 22.3 24.8 30.4 33.6 Charlottetown extax 36.2 27.3 31.3 26.2 32.1 30.5 30.9 33.5 27.3 29.9 29.7 29.1 23.1 34.1 24.2 25.0 33.8 29.4 25.8 28.2 25.3 26.2 Saint John Halifax extax extax 34.6 23.0 25.3 34.9 32.7 24.8 32.1 32.7 26.3 25.9 29.2 23.8 29.3 27.4 31.3 30.0 30.3 22.8 25.1 29.7 32.9 29.8 23.1 28.4 28.8 28.8 33.7 26.6 25.6 33.4 32.5 26.5 30.6 23.5 25.2 28.2 27.2 27.5 34.4 33.2 25.5 30.8 29.8 24.6 32.2 32.4 21.7 30.5 24.4 25.7 Quebec extax 32.4 25.5 27.7 28.2 36.6 28.0 28.8 32.1 24.2 24.9 35.2 34.9 30.0 33.2 27.2 27.7 27.7 32.7 23.3 25.7 23.0 33.8 36.9 30.3 29.2 30.8 29.0 27.0 29.6 36.5 28.4 26.9 30.3 23.8 Canada Avg extax 29.5 31.9 30.

7 22.8 23.4 24.2 20.2 23.8 27.5 21.7 18.2 23.5 17.1 20.5 22.5 20.9 24.4 21.8 22.3 19.0 19.3 21.7 21.2 29.3 20.6 20.2 22.6 19.3 22.3 18.1 22.4 22.4 21.1 15.3 21.4 23.4 21.4 17.6 19.0 23.2 19.2 21.4 20.4 20.3 22.7 22.3 23.5 20.1 22.1 21.7 22.1 21.2 21.5 19.6 23.2 20.2 18.2 20.5 21.7 MJ ERVIN & ASSOCIATES 94 .7 21.3 21.1 20.7 18.5 20.3 23.3 21.6 23.4 21.1 22.8 21.1 18.0 24.2 17.4 19.9 19.6 18.0 22.1 22.3 20.5 21.2 20.8 19.8 19.3 23.2 21.2 18.3 24.1 20.8 Ottawa rack Thunder Bay rack 20.1 Halifax rack 20.7 22.4 21.7 22.7 22.3 23.0 21.3 22.3 23.5 21.4 20.2 22.0 23.6 23.9 18.2 19.7 22.2 21.7 23.2 20.9 18.0 23.3 23.5 26.4 15.6 21.0 23.4 22.1 21.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.4 22.0 20.6 19.6 22.4 20.2 23.3 18.1 22.0 22.5 19.3 17.9 20.2 Quebec city Montreal rack Toronto rack rack 19.8 20.8 22.4 22.9 22.1 20.Table F: Rack Prices .0 23.8 20.2 21.9 21.4 23.3 24.9 22.8 24.7 20.1 19.4 21.6 19.6 23.1 22.6 19.9 21.9 22.4 22.7 22.5 17.8 20.5 22.3 26.5 21.8 25.8 21.1 21.5 22.9 22.0 21.8 19.0 23.7 20.8 19.8 20.9 18.5 24.3 17.1 20.9 21.9 23.9 21.1 24.0 20.5 21.0 21.0 21.7 19.7 21.1 21.5 18.1 21.2 19.6 19.7 20.1 20.5 23.5 24.1 23.4 20.0 21.4 22.1 20.6 23.2 23.2 18.8 23.2 18.4 23.9 25.8 18.9 22.8 23.2 16.8 23.3 20.7 23.1 23.4 21.6 25.5 27.5 21.4 22.4 21.8 22.0 22.6 21.7 16.0 19.2 20.8 21.9 17.5 23.5 20.2 21.9 23.8 21.2 16.2 16.1 22.0 23.0 22.6 20.0 23.8 22.4 23.3 21.0 19.3 18.1 16.0 22.6 20.4 22.1 19.6 20.5 17.9 20.8 20.8 18.6 25.6 20.5 24.8 23.3 20.6 20.4 21.2 21.3 22.8 23.7 17.1 23.9 21.4 21.2 18.4 22.7 22.7 21.5 22.6 25.7 19.8 21.9 18.4 21.0 22.4 22.9 20.9 22.0 21.6 20.8 22.8 21.5 22.4 21.7 17.7 17.1 20.2 22.1 19.5 23.3 23.4 18.6 23.7 21.8 23.5 18.3 19.1 21.8 18.3 19.1 15.9 21.5 22.4 21.8 20.3 19.1 21.0 21.9 22.5 21.7 21.8 18.3 17.4 22.2 21.7 21.

0 21.2 22.5 21.6 20.3 19.4 24.2 18.7 21.1 20.9 22.2 22.8 23.8 Vancouver Victoria rack rack 24.3 22.0 22.2 20.7 22.2 22.9 23.9 22.4 23.4 18.7 23.4 22.1 21.4 20.2 23.6 23.6 20.6 22.1 25.9 19.5 23.6 25.2 23.1 21.3 20.1 16.1 22.8 22.6 17.5 21.2 24.0 22.4 24.7 25.7 21.9 19.6 17.6 23.9 19.8 21.6 21.0 20.5 19.5 23.3 24.7 23.6 21.5 20.2 20.2 24.4 19.1 25.5 MJ ERVIN & ASSOCIATES 95 .9 20.3 21.1 23.3 23.0 23.1 23.2 21.0 22.0 17.1 22.6 21.8 22.2 Edmonton Rack 23.8 23.5 23.5 21.8 20.4 21.9 23.3 23.3 20.6 23.5 Canada avg rack 22.1 21.5 21.0 24.8 20.1 23.7 23.8 20.6 24.9 23.0 22.5 23.7 18.9 24.2 23.5 24.3 23.2 22.5 24.7 22.9 21.8 22.9 22.6 19.5 20.2 19.2 20.0 23.2 23.8 24.0 24.5 21.6 22.8 24.3 23.8 21.2 21.5 21.0 24.2 24.0 21.1 22.9 24.7 24.1 23.6 23.7 17.7 22.3 24.6 22.4 21.8 24.6 20.9 20.3 22.5 24.1 23.7 21.5 22.4 21.1 23.0 23.3 23.4 23.5 17.8 18.0 22.3 17.8 20.9 18.1 23.2 21.2 20.2 22.5 21.3 23.6 23.1 22.1 17.0 23.1 20.4 23.4 22.9 22.6 21.7 21.5 23.7 23.3 17.7 21.6 21.3 23.6 21.4 22.6 21.9 21.8 19.7 24.8 25.2 21.4 21.6 25.1 23.4 21.1 16.7 21.1 20.8 21.7 21.9 21.2 24.9 17.2 19.3 21.1 19.2 23.1 25.9 24.1 24.7 23.3 22.4 24.0 21.0 20.4 21.5 20.0 25.8 22.2 21.0 21.7 22.1 18.7 25.3 20.9 22.5 21.9 18.9 23.4 25.1 21.9 21.3 24.9 23.6 20.5 22.6 19.0 22.1 18.5 19.8 20.0 22.4 20.5 18.5 19.3 21.7 24.3 18.9 22.8 23.5 21.8 21.2 20.7 22.1 22.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.7 22.1 21.7 19.1 19.9 22.7 22.5 22.3 21.0 24.5 18.9 21.Table F: Rack Prices .0 18.2 22.9 19.6 23.7 21.7 21.7 20.0 18.9 21.4 21.6 22.0 21.7 22.9 22.7 21.4 19.5 22.8 22.4 24.9 23.6 25.6 21.3 22.1 21.4 22.2 23.9 21.3 24.9 22.2 24.6 21.7 21.3 17.5 19.2 22.5 24.0 20.0 17.5 23.4 21.1 22.9 19.1 23.9 19.7 21.5 21.1 21.6 21.9 20.5 22.1 23.0 20.5 23.7 22.0 22.7 17.6 24.2 22.1 21.7 22.5 22.4 23.4 22.3 20.0 23.9 21.8 22.5 20.3 19.9 21.9 19.6 23.8 23.6 23.

834 71.830 2.Table G: Study Market Data .810.529 123.73 65.745.02 51.030.90 63.712 1.412 722.377 30.40 54.250 748.770 2.45 63.20 60.42 53.687 1.113 2.18 51.72 63.20 54.150 48.513 19.018 2.204.220 389.093.65 54.837 329.194.30 54.85 48.686 273.400 142.72 58.192 2.060.19 52.23 63.87 61. MJ ERVIN & ASSOCIATES 96 .052 84.19 49.22 59.000 63.897 350.850 126.370 41.014 3.70 55.460 833.621 102.483 63.92 51.211 15.141.241 451.249.70 49.483 2.10 53.298 576. and All Study Markets are weighted (by market population) averages.597 2.811 120.056.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.698 Note: Regional.36 54.922 103.935 758.89 65.23 53.983 1.245 351.55 58.238 2.50 56.508 2.448.66 50.53 48.543 2.50 56.420.414 450.03 58.30 54.35 73.334.173 568.678.643 184.704.85 54.500 378.300 578.38 56.90 62.000 217.796 2.97 51.72 74.53 61.636.120 570.000 1.94 55.80 64.40 58.20 61.26 44.00 57.89 61.10 63.749 243.17 Diesel 64.557.24 61.671 399.101 256.40 61.32 51.10 59.00 57.88 54.16 59.246 2.895 600.859 240.702.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.101 447.50 55.174.858.48 56.10 52.972 429.26 49.949 1.196 669.669 203.00 67.985 636.30 68.13 58.97 63.98 59.832 91.20 58.268 478.00 48.07 61.83 68.119 632.749 91.26 63.25 57.145.549 111.74 57.933 25.89 60.60 70.45 53.554 2.296 179.90 67.102 98.20 59.78 67.60 50.905 183.980 120.790 185.30 63.620.997 397.625 64.009 54.30 66.903 33.60 60.018.000 1.00 66.894 1.890 2.30 52.60 49.516.40 59.88 64.86 56.93 63.945.166 102.153 316. Urban.40 63.30 57.00 62.971 473.11 58.438 591.628 702.34 63.475 1.214 248.28 65.796 529.058 2.702 333.234 799.332 101.614 3.

33 27.25 31.23 23.97 25.35 25.39 22.64 28.93 23.88 20.49 21.09 24.39 21.63 24.42 24.83 24.59 22.59 28.42 25.59 24.89 29.47 28.Table H: Study Market Data .03 20.45 20.45 28.33 21.43 21.92 21.98 25.84 28.83 25.36 26.23 26.51 25.88 28.42 27.93 27.16 22.07 24.83 23.87 26.99 28.98 28.26 28.03 21.25 24.90 26.41 27.18 28.63 26.74 21.89 28.92 20.97 22.94 23.39 22.78 Product taxes Midgrade Regular 26.69 23.95 22.48 25.63 20.51 25.45 24. MJ ERVIN & ASSOCIATES 97 .42 24.89 25.32 33.76 25.47 27.81 27.81 28.08 23.15 29.95 25.53 23.50 20.45 22.45 20.84 28.88 28.43 20.04 24.30 29.27 20. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.Rack Price.49 25.88 22.59 28.96 22.03 24.95 22.51 31.54 28.07 26.43 21.27 29.88 22.85 28. and All Study Markets are weighted (by market population) averages.15 20.50 25.96 24.83 22.36 24.33 21.63 28.97 23.45 24.25 28.76 24.45 20.08 25.15 27.33 21.57 22.38 24.39 Note: Regional.33 22.21 27.59 28.21 27.68 Diesel 36.38 24.92 22.96 24.13 23.01 28.47 20.16 21.31 22.06 28.43 28.91 21.99 26.65 26.25 27.18 25. Tax (by Grade) Rack Pt.75 22.39 21.56 22.20 27.83 24.23 24.75 27.02 23.65 21.59 22.34 26.63 21.07 24.07 26.45 25.63 25.34 20.81 25.11 26.45 29.33 21.04 26.43 20.15 24.90 27.73 32.89 26.16 29.26 27.88 20.37 27.01 22.34 25.69 27.17 20.57 29.65 27.40 25.32 21.73 26.28 22.93 23.55 28. Urban.23 25.45 29.33 22.55 28.28 23.33 22.82 28.49 31.07 24.51 20.81 21.09 27.45 23.33 21.45 20.95 Premium 26.83 24.41 22.49 21.92 30.82 21.20 20.40 27.58 25.

52 5.47 58.64 3.07 0. and All Study Markets are weighted (by market population) averages.95 21. Variance uses the formula [n∑x2 .51 11.47 0.01 0.50 58.29 24.81 28.57 12.58 66.85 24.83 12.77 5.95 6.86 28.38 28.33 .00 4.73 1.16 54.88 31.22 14.35 58.50 3.26 3.04 28.39 56.66 28.22 1.36 20.26 5.83 1.06 28.68 2.91 29.44 56.24 7.34 0.64 1.68 7.18 21.64 2.10 6.38 22.07 0.90 23.29 7. Costs.28 1.91 2.59 4.94 Note: Regional.83 36.84 5.17 1.41 29.99 0.Blended Prices. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.24 23.89 21.97 0.17 11.00 58.81 26.41 12.Table J: Study Market Data .43 0.23 38.94 17.(∑x)2 ]/n2.29 8.13 11.44 25.36 0.50 0.33 9.38 0.85 11.38 2.53 21.30 5.82 3.76 5.21 8.28 56.77 30.83 27.12 23.08 0.91 0.92 22.64 3.08 17.54 50.82 32.22 5.18 7.17 26.02 3.56 4.91 22.72 26.14 60.42 2.68 7.45 6.53 22. Urban.03 28.63 60.48 7.04 0.98 0.71 33.21 8.20 5.30 12.63 58.94 22.98 0.27 62.77 37.98 31.04 22.73 2.04 23.60 23.10 3.12 6.73 22.53 6.34 1.90 59.25 1.26 27.84 28.98 1.56 24.35 27.11 31.80 1.85 21.16 3.07 30.75 28.19 5.15 66.96 28.52 30.28 1.80 9.49 57.44 33.73 10.13 0.79 0.21 24.79 33.43 23.86 49.27 60.02 13.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.70 22.31 28.62 56.08 55.85 26.60 14.37 26.96 3.99 2.89 0.13 28.31 23.96 25.38 7.89 28.82 95 Retail Gross Product Margin 6.50 10.27 11.02 0. MJ ERVIN & ASSOCIATES 98 .32 31.49 2.00 22.93 22.45 1.35 28.05 6.14 7.03 7.93 56.033 0.75 23.08 3.27 6.35 60.78 2.00 0.24 7.17 9.31 0.06 0.60 7.83 21. Average Deviation is the average deviation of the market values from their mean (average) value.41 7.31 34.96 27.01 31.28 27.16 20.23 7.20 14.11 26.02 22.58 1.18 55.06 5.88 5.

089.934 3.550 $ 177.023 $ (15.875 $ 255.013 $ 227.129 $ 97.058.520 5. these averages are based on all applicable study markets.648 3.144 2.638 2.852) $ 119.948 3.263 $ 60.265.068 3.375) $ (49.766) $ (274.995 $ 234.032 $ 77.074 $ 131.866) $ (244. Urban.098.646) $ (98.622 $ 174. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.014. Revenue.117 $ 207.779 $ 121.900 $ 179.677 $ 180.746 $ (374.120 $ 54.688 $ 85.716 Note: Regional.223.302 $ 69.966 3.913 $ 139.244 95 net retail Ancillary Revenue petroleum revenue $ 208.750 $ 271. outlet costs.429 $ 238.542 $ 222.098 $ (320. and consolidated outlet income these averages are based only on those markets with available data.900 2.295 $ 174.481 $ 96.827.067 $ 92.247 4.217 2.855 $ 278.871) $ (128.095.272 $ 118.Table K: Study Market Data .890.081 $ 222.010 1.102 $ 223.208) $ (226.000) $ (241.956) $ 200. and All Study Markets are weighted (by market population) averages.197.478 4.604.272 $ 210.800 $ 225.564 $ 252. Outlet Costs.719 3.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.502 $ (80) $ 60.367) $ (164.510 $ 60.794 3.658.772.071.694 3.993 $ 113.246 $ 118.707 $ 260.157.000 $ 156.911) $ (166.630 3.542.526 $ 207.209 $ 82.557) $ 102.000 2.209 $ 26.135 $ 199.640 4.467 $ 96.394.623 2.250.632 $ 256.332) $ (238.626 $ 81.066 3. For 95 net retail petroleum revenue.279 $ 154.572) $ (286.856 3.143) $ (249.465.837 $ 56.224 $ 189.289 981.780 $ 85. MJ ERVIN & ASSOCIATES 99 .241) $ (227.Sales.544 $ 175.004. but for ancillary revenue.885.011.805.550 694.

23 6 7.Demographic Profiles Population pop’n 299 .465 694 3. inverse ranking is used (lowest value = 1).30 0.775 678.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.675 179.97 8.53 10 6.745 16.22 3.73 5 10.27 0.20 0.542.315 710.098 4.43 12.50 3 10.180 616.605 16. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.80 10 4. rank* 3.52 13 5.06 16 4.04 15 4.95 3 9. MJ ERVIN & ASSOCIATES 100 .79 6.40 9 4.50 9.91 12.84 12 5. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.21 0.604 3.658 3.394 2.585 6. of Outlets No.54 6 2.45 14.28 17.88 11 8.02 0.29 8 7.89 2 4.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.68 4 7.145 81.265 2.01 7 2.13 2 11.20 17 14.98 7.22 0.51 9 11.004 3.42 5 14.870 120.310 1.41 0.970 330.55 19 11.775. of Brands No.45 0.88 12 7.60 11 7.095 3.60 3.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.91 17 4.96 5.08 4 2.400 74.89 7.38 0.827 3.24 0.29 1.48 7 7.550 1.223 3.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.10 3.73 14.47 14 3.30 1.76 18 5.85 15 11.08 16 3.089 3.250 981 2.06 5.23 8 31.275.475 3.00 11.50 8.715 14.27 1.790 1.975 2.157 2.845 15.058 1.41 1.Table L: Study Market Data .17 19 9.40 1 3. N refers to study sample size (total = 481).395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.000 pop’n No.014 5.08 3.071 2.98 6.06 1 5.47 7.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.36 5.90 13 4.33 0.

safety and business issues. They maintain a large database of historical prices at most major centres. Contact: Michael J.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Ottawa ON.14th Street NW Calgary AB. 119 . and in doing so. Contact: Maureen Monaghan Address: 580 Booth Street. Ervin. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. The SCF is the basis for this study. Contact: Cindy Christopher. Ottawa ON.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. cardlock. Vice President Public Affairs Address: 275 Slater Street. accessible through a public fax-back dial-in system. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). aviation and lubricants marketing channels. health. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Ottawa ON. a series of studies whose goal is to strengthen Canada’s competitiveness. generate jobs and growth. They work with major oil companies in benchmarking performance in the retail. Contact: Brendan Hawley. and provide background resources to industry public affairs managers and the media. Petroleum Products Address: 235 Queen Street. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. bulk. Principal Address: #400. Senior Advisor. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 .

Octane is published quarterly. Contact: Gerard O’Connor. and is a useful “window” on this industry.ab. Supervisor. Contact: Robert Curran. Calgary AB.6th Avenue. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.6th Ave. 101 . Contact: Len Bradley. Its monthly publication “Refined Petroleum Products” (cat. Executive Director Address: 214. Managing Editor Address: Suite 2450.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Energy Section Address: Statistics Canada. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Ottawa ON. SW Calgary.Octane Magazine Octane is Canada’s refining and marketing trade journal. 311 . no 45-004) is a useful source of supply and demand volume data.

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